SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
_X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-20335
OSB FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
Wisconsin 39-1726499
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
420 South Koeller Street
Oshkosh, Wisconsin 54902
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (414) 236-3680
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Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01 Per Share
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or other information statements
incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
The aggregate market value of the common stock held by
nonaffiliates of the registrant, based on the closing sales price
of the registrant's common stock as of March 5, 1997, was
$29,450,624 (920,332 shares at $32 per share). For purposes of
this calculation, non-affiliates are assumed to be persons other
than directors and executive officers of the registrant and the
registrant's employee stock ownership plan.
As of March 5, 1997, there were issued and outstanding
1,112,984 shares of the registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
None.
2
ITEM 1. BUSINESS
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GENERAL
OSB Financial Corp., a Wisconsin corporation ("OSB
Financial" or the "Corporation"), became the unitary savings and
loan holding company for Oshkosh Savings Bank, FSB ("Oshkosh
Savings" or the "Savings Bank") upon the Savings Bank's
conversion from a state-chartered-mutual savings and loan
association to a federal mutual savings bank and then to a
federal stock savings bank ("Conversion"). The Conversion was
completed on June 30, 1992. At December 31, 1996, the
Corporation had total consolidated assets of $255.1 million and
consolidated shareholders' equity of $31.8 million. OSB
Financial is not engaged in any other business activity other
than holding the stock of the Savings Bank.
The Savings Bank was chartered originally in 1886. The
deposits of the Savings Bank are insured by the Federal Deposit
Insurance Corporation ("FDIC") under the Savings Association
Insurance Fund ("SAIF"). The Savings Bank conducts its business
through seven full service offices located throughout Wisconsin's
"Fox River Valley."
The Savings Bank emphasizes the origination of permanent and
construction loans secured by one- to four-family residential
real estate. The Savings Bank also originates multi-family
residential real estate, commercial real estate, consumer and
other loans. A Business Banking Department, which offers loans
and deposit products to small businesses and professional firms,
began operating in 1995.
At December 31, 1996, the Savings Bank's loan portfolio
totaled $171.8 million, or 67% of total assets, including
$128.3 million (or 75% of total loans) secured by first mortgages
on one- to four-family properties. Of this amount, $1.1
million are fixed-rate loans held for sale. Loans receivable and
loans originated, which are referred to herein, include loans
held for sale, unless otherwise indicated. Currently, all of the
Savings Bank's fixed-rate mortgage loan originations with terms
of 15 years or longer are being held for sale. Furthermore, at
December 31, 1996, 68% of the Savings Bank's gross loan portfolio
consisted of floating-rate-residential-mortgage loans or
adjustable-rate-residential- mortgage loans (collectively
referred to as "ARMs").
The executive offices of the Corporation and Savings Bank
are located at 420 South Koeller Street, Oshkosh, Wisconsin and
the telephone number is (414) 236-3680.
3
PENDING MERGER
OSB Financial entered into an Agreement and Plan of Merger,
dated as of November 13, 1996 (the "Merger Agreement"), providing
for the merger (the "Merger") of OSB Financial with and into FCB
Financial Corp. ("FCB"), pursuant to a "merger of equals"
transaction. FCB will be the surviving corporation in the Merger
and will continue to operate under the name FCB Financial Corp.
The Merger Agreement has been approved by the Boards of Directors
of both of the constituent companies and, subject to shareholder
approval of both FCB and OSB Financial shareholders as well as
various regulatory approvals, the Merger is expected to be
completed during the second quarter of 1997. The banking
subsidiaries of the two merger partners are also expected to
merge and will thereafter operate under the name Fox Cities Bank,
FSB.
4
AVERAGE BALANCE SHEET
The following table sets forth, for the periods indicated,
information regarding (i) the total dollar amount of interest and
dividend income of the Corporation from interest-earning assets
and the resultant average yields, (ii) the total dollar amount of
interest expense on interest-bearing liabilities and the
resultant average cost, (iii) net interest income, (iv) interest
rate spread and (v) net interest margin.
Year Ended December 31,
1996 1995 1994
-------------------------- -------------------------- -----------------------
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
-------- --------- ------ ------- --------- ------ ------- --------- ------
(Dollars in Thousands)
Interest-earning assets:
Mortgage loans . . . . $140,149 $10,697 7.63% $140,026 $10,610 7.58% $107,231 $ 8,214 7.66%
Loans held for sale . . 1,490 118 7.92 881 68 7.72 3,174 246 7.75
Consumer and
Commercial loans . . 27,808 2,605 9.37 16,818 1,531 9.11 10,933 907 8.30
------- ------- ----- ------- ------------ ------- ------- -----
Total loans(1) . . . 169,447 13,420 7.92 157,725 12,209 7.74 121,338 9,367 7.72
Mortgage-backed
securities . . . . . 47,257 3,226 6.83 47,295 3,233 6.84 38,779 2,278 5.87
Investment securities . 24,053 1,365 5.67 32,860 1,850 5.63 36,117 1,934 5.35
Daily interest-
bearing deposits . . 3,046 183 6.01 742 42 5.72 2,299 96 4.18
Other earning assets 3,211 207 6.45 2,752 181 6.59 1,569 100 6.44
------- ------- ----- ------- ------- ----- ------- ------- -----
Total interest-
earning assets . . 247,014 18,401 7.45 241,374 17,515 7.26 200,102 13,775 6.88
Noninterest-earning assets:
Office properties and
equipment, net . . . 3,639 -- -- 3,769 -- -- 3,701 -- --
Real estate, net . . . 504 -- -- 725 -- -- 586 -- --
Other noninterest-
earning assets . . . 2,863 -- -- 3,516 -- -- 3,966 -- --
------- ------- ----- ------- ------ ----- ------- ------ -----
Total assets . . . . $254,020 $18,401 7.24% $249,384 $17,515 7.02% $208,355 $13,775 6.61%
======= ====== ==== ======= ====== ===== ======= ====== =====
Interest-bearing liabilities:
Passbook accounts . . . $ 19,844 $ 480 2.42% $ 25,690 $ 703 2.74% $ 27,964 $ 780 2.79%
Negotiable order of
withdrawal ("NOW")
accounts . . . . . . 12,769 226 1.77 11,581 182 1.57 9,934 224 2.25
Money manager accounts 3,837 125 3.26 5,596 176 3.15 6,603 159 2.41
5
Year Ended December 31,
1996 1995 1994
-------------------------- -------------------------- -----------------------
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
-------- --------- ------ ------- --------- ------ ------- --------- ------
(Dollars in Thousands)
Money market index
accounts . . . . . . 15,039 714 4.75 1,680 91 5.42 -- -- --
Certificates of
deposit . . . . . . . 106,979 6,204 5.80 113,227 6,556 5.79 98,128 4,713 4.80
------- ------- ----- ------- ------- ----- ------- ------- -----
Total deposits . . . 158,468 7,749 4.89 157,774 7,708 4.89 142,629 5,876 4.12
Borrowed funds . . . . 55,128 3,116 5.65 52,991 3,237 6.11 27,311 1,337 4.90
------- ------- ----- ------- ------- ----- ------- ------- -----
Total interest-
bearing
liabilities . . . . 213,596 10,865 5.09 210,765 10,945 5.20 169,940 7,213 4.24
Noninterest-bearing
liabilities:
Noninterest-bearing
deposits . . . . . . 1,281 -- -- 646 -- -- 99 -- --
Other liabilities . . . 7,386 -- -- 10,382 -- -- 4,698 -- --
------- ------- ----- ------- -------- ----- ------- ------- -----
Total liabilities . . 222,263 10,865 4.89 221,793 10,945 4.93 174,737 7,213 4.13
Shareholders' Equity . . 31,757 -- -- 27,591 -- -- 33,618 -- --
------- ------- ----- ------- ------- ----- ------- ------- -----
Total liabilities
and shareholders'
equity . . . . . . $254,020 $ 10,865 4.28% $249,384 $10,945 4.39% $208,355 $ 7,213 3.46%
======== ======== ===== ======== ======= ===== ======== ======= =====
Net interest income . . . $7,536 $6,570 $ 6,562
======= ======= =======
Interest rate spread . . 2.36% 2.06% 2.64%
Net interest margin . . . 3.05% 2.72% 3.28%
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities . . . . . . 115.65% 114.52% 117.75%
======= ======= =======
- -------------------------
(1) Nonaccrual loans are included in average balances, but no interest is recognized.
See "-- Nonperforming Assets and Delinquencies."
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding
changes in interest income and interest expense of the
Corporation for the periods indicated. For each category of
interest-earning asset and interest-bearing liability,
6
information is provided on changes attributable to rates and
volumes on net interest income of the Corporation. Information
is provided with respect to (i) effects on interest income
attributable to changes in volume (changes in volume multiplied
by prior rate); (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume); and
(iii) changes in rate/volume (change in rate multiplied by change
in volume).
Years Ended December 31, Years Ended December 31,
1996 Compared to 1995 1995 Compared to 1994
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------- ------------------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
---- ------ ------ --- ---- ------ ------ ---
(Dollars in Thousands)
Interest-earning assets:
Mortgage loans . . . . . . . . . $ 70 $ 9 $ 8 $ 87 ($86) $2,512 ($30) $ 2,396
Loans held for sale . . . . . . 2 47 1 50 (1) (178) 1 (178)
Consumer and Commercial 44 1,001 29 1,074 89 488 47 624
loans . . . . . . . . . . . . ------ ------ ------ ------ ------ ------ ------ ------
Total loans . . . . . . . . . . 116 1,057 38 1,211 2 2,822 18 2,842
Mortgage-backed securities . . . (5) (3) 1 (7) 376 500 79 955
Investment securities . . . . . 13 (496) (2) (485) 101 (174) (11) (84)
Daily interest-bearing
deposits . . . . . . . . . . . 2 132 7 141 35 (65) (24) (54)
(4) 30 -- 26 3 76 1 80
Other earning assets . . . . . . ------ ------ ------ ------ ------ ------ ------ ------
Total net change in income 122 720 44 886 517 3,159 63 3,739
interest-earning assets . . ------ ------ ------ ------ ------ ------ ------ ------
Interest-bearing liabilities:
Transaction accounts . . . . . (84) (159) 13 (230) (62) (43) 3 (102)
Certificates of deposit . . . (291) 588 (26) 271 1,108 671 155 1,934
(244) 131 (8) (121) 330 1,258 312 1,900
Borrowed funds . . . . . . . . ------ ------ ------ ------ ------ ------ ------ ------
Total net change in expense
on interest-bearing (619) 560 (21) (80) 1,376 1,886 470 3,732
liabilities . . . . . . . . ------ ------ ------ ------ ------ ------ ------ ------
Net change in net interest $ 741 $ 160 $ 65 $ 966 ($859) $1,273 ($407) $ 7
income . . . . . . . . . . . . . ====== ====== ====== ====== ====== ====== ====== ======
7
ASSET AND LIABILITY MANAGEMENT
The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are
"interest rate sensitive" and by monitoring an institution's
interest rate sensitivity "gap." An asset or liability is said to
be interest rate sensitive within a specific time period if it
will mature or reprice within that time period. The interest
rate sensitivity gap is defined as the difference between the
amount of interest-earning assets anticipated, based upon certain
assumptions, to mature or reprice within a specific time period
and the amount of interest-bearing liabilities anticipated, based
upon certain assumptions, to mature or reprice within that time
period. A gap is considered positive when the amount of interest
rate sensitive assets exceeds the amount of interest rate
sensitive liabilities. A gap is considered negative when the
amount of interest rate sensitive liabilities exceeds the amount
of interest rate sensitive assets. During a period of rising
interest rates, a negative gap would tend to adversely affect net
interest income while a positive gap would tend to result in an
increase in net interest income. During a period of falling
interest rates, a negative gap would tend to result in an
increase in net interest income while a positive gap would tend
to adversely affect net interest income.
Certain shortcomings are inherent in the method of analysis
presented in the following two tables. For example, although
certain assets and liabilities may have similar maturities or
periods of repricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance
of changes in market interest rates, while interest rates on
other types may lag behind changes in market rates.
Additionally, certain assets, such as ARM loans, have features
which restrict changes in interest rates on a short-term basis
and over the life of the asset. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels
would likely deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to
service their debt may decrease in the event of an interest rate
increase.
The Savings Bank's analysis of its interest-rate sensitivity
incorporates certain assumptions concerning the amortization of
loans and other interest-earning assets and the withdrawal of
deposits. The interest-rate sensitivity of the Savings Bank's
assets and liabilities illustrated in the table could vary
substantially if different assumptions were used or if actual
experience differs from the assumptions used. The Savings Bank
relies upon interest rate sensitivity analysis performed on a
quarterly basis by the OTS, the primary regulator of the thrift
industry. The OTS performs analysis upon data provided by the
Savings Bank (and all other institutions) in quarterly reports.
The OTS relies upon national averages to calculate anticipated
repayment rates on loans and the decay rates of core deposits.
The Savings Bank believes that the OTS assumptions are a
8
realistic representation of its own portfolio. At December 31,
1996, the Savings Bank had $1.1 million of loans held for sale.
The Savings Bank anticipates selling these loans during 1997;
accordingly, the Savings Bank has assumed that all loans held for
sale reprice within six months after December 31, 1996.
The following table sets forth certain information relating
to the Savings Bank's earning assets and interest-bearing
liabilities which are estimated to mature or are scheduled to
reprice within one year.
At December 31,
-----------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
Interest-earning assets maturing or repricing
within one year . . . . . . . . . . . . . . . $125,939 $142,960 $138,033
Interest-bearing liabilities maturing or
repricing within one year . . . . . . . . . . $146,122 $162,590 $122,599
Ratio of interest-earning assets over interest-
bearing liabilities as a percent of total
assets . . . . . . . . . . . . . . . . . . . . (7.91%) (7.53%) 11.66%
Percent of assets to liabilities maturing or
repricing within one year . . . . . . . . . . 86.19% 87.93% 112.59%
9
The following table presents the Corporation's interest
sensitivity gap between interest-earning assets and interest-
bearing liabilities at December 31, 1996.
Within Six 6 Months to Over 5
Months One Year 1-3 Years 3-5 Years Years Total
------- -------- --------- -------- ------ -----
(Dollars in Thousands)
Interest-earning assets
Fixed-rate mortgage loans . . . . $1,899 $3,395 $10,238 $5,840 $1,427 $22,799
Loans held for sale . . . . . . . 1,137 -- -- -- -- 1,137
Adjustable rate mortgage loans . 27,684 37,623 28,187 12,779 9,175 115,448
Consumer and commercial loans . . 11,719 2,112 3,169 5,634 14,640 37,274
Securities available for sale . . . 36,923 3,447 13,421 3,229 13,291 70,311
------- ------- ------- ------- ------- -------
Total rate sensitive assets . . . . 79,362 46,577 55,015 27,482 38,533 246,969
------- ------- ------- ------- ------- -------
Interest-bearing liabilities
Deposits:
Regular savings & NOW accounts . 5,856 5,168 11,563 6,921 7,967 37,475
Money market index accounts . . . 15,288 -- -- -- -- 15,288
Certificates of deposit . . . . . 41,741 30,259 32,450 4,909 -- 109,359
Borrowed funds . . . . . . . . . 40,750 7,060 7,350 -- -- 55,160
------- ------- ------- ------- ------- -------
Total rate sensitive liabilities . 103,635 42,487 51,363 11,830 7,967 217,282
------- ------- ------- ------- ------- -------
Excess (deficiency) of interest
sensitive assets over interest
sensitive liabilities . . . . . . ($24,273) $4,090 $3,652 $15,652 $30,566 $29,687
========= ====== ====== ======= ======= =======
Ratio of interest-earning assets
to interest bearing liabilities . 76.58% 109.63% 107.11% 232.31% 483.59%
Interest sensitivity gap to total
assets . . . . . . . . . . . . . . (9.51%) 1.60% 1.43% 6.14% 11.98%
Cumulative excess (deficiency) of
interest sensitive assets . . . (24,273) (20,183) (16,531) (879) 29,687
Cumulative ratio of interest
earning assets to interest
bearing liabilities . . . . . . . 76.58% 86.19% 91.63% 99.58% 113.66%
Ratio of cumulative gap to total
assets . . . . . . . . . . . . . (9.51%) (7.91%) (6.48%) (0.34%) 11.64%
The elements of the Corporation's strategy to manage the
interest rate sensitivity of the Corporation's assets and
liabilities, include:
ORIGINATE ADJUSTABLE RATE MORTGAGE LOANS FOR THE SAVINGS
BANK PORTFOLIO. Historically, the Savings Bank has focused on
the origination of mortgage loans for its own portfolio. The
Savings Bank currently offers ARMs tied to various indices. At
December 31, 1996, the Savings Bank had $115.4 million of
10
adjustable rate residential real estate loans, or 65% of the
Savings Bank's total loan portfolio. The Savings Bank originated
approximately $18.4 million of ARMs during 1996. The origination
of ARMs makes the Savings Bank's loan portfolio more interest
rate sensitive and will generally result in less income and
originations in a declining interest rate environment. See
"Lending Activities".
INCREASED EMPHASIS ON CONSUMER LENDING. The Savings Bank
began originating consumer loans in 1981 in response to state
regulatory authority for such lending. Since that time, the
Savings Bank's consumer loan portfolio has grown to $18.6
million, or 10.5% of the Savings Bank's loan portfolio before
deductions. The Savings Bank's consumer lending activities
include the origination of primarily home equity loans and home
equity lines of credit with first or second lien positions on
real estate, automobile loans, mobile home loans, student loans
and loans secured by savings accounts. The majority of the
Savings Bank's consumer loan portfolio at December 31, 1996, was
comprised of home equity/second mortgage loans in the amount of
$14.2 million, or 76.3% of the Savings Bank's total consumer loan
portfolio and 8.0% of its total gross loan portfolio. Consumer
loans generally have higher interest rates than adjustable rate
residential real estate loans, but involve higher risks of
default. See "-- Lending Activities -- Consumer Loans."
ORIGINATE INCOME PRODUCING PROPERTY LOANS TO COMPLEMENT THE
SAVINGS BANK'S ADJUSTABLE RATE PORTFOLIO. Income-producing
property loans are defined as loans secured by multi-family,
nonowner-occupied residential real estate or loans secured by
commercial real estate. At December 31, 1996, the Savings Bank
had $6.4 million of multi-family loans and $15.1 million of
commercial real estate loans, or 12.2% of its gross loan
portfolio. The Savings Bank originated $7.3 million of multi-
family and commercial real estate loans in 1996. Loans offered
by the Savings Bank on income producing properties are tied to
the one-year Constant Maturing Treasury ("CMT") index, the prime
rate or other similar indices or are written on a balloon note
with a term typically in the range of one to five years. Income
property loans generally are originated with a loan to value
ratio of 75% or lower and have higher interest rates than
adjustable rate residential real estate loans but involve higher
risks of default. Underwriting policies developed to reduce this
risk include a conservative approach to recognition of rental
income, limiting loans available to one borrower, and obtaining
an assignment of rents in all applicable cases. See "Lending
Activities -- Commercial Real Estate."
BUSINESS BANKING. The Savings Bank established a Business
Banking Department to provide a full line of loan and deposit
products to small to medium-size businesses and service
professionals. The Department commenced operating in early 1995.
Commercial loans increased to $18.7 million, or 10.6% of all
loans outstanding at December 31, 1996, $15.1 million of which
11
were commercial real estate loans and $3.6 million of which were
commercial business loans. The commercial real estate loans are
discussed above. See also "Lending Activities--Commercial Real
Estate." Commercial business loans provide higher yields than
the traditional loan products offered by the Savings Bank, but
involve higher risks of default if a business fails.
Conservative underwriting and regular monitoring of business
performance are used to mitigate that risk. See "Lending
Activities -- Commercial Business Loans."
LENDING ACTIVITIES
GENERAL. Historically, the principal lending activity of
the Savings Bank has consisted of the origination of first
mortgage loans for the purchase of single-family residential
properties. In addition, Oshkosh Savings originates multi-family
residential, construction and commercial real estate, consumer
and other loans. Substantially all conventional residential
loans originated by the Savings Bank or purchased in the
secondary market are underwritten to the standards of the Federal
National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC") and are secured by properties
located in the Savings Bank's local market area. As of
December 31, 1996, $128.3 million, or 74.7%, of the Savings
Bank's loan portfolio consisted of first mortgage loans secured
by one- to four-family residential properties.
12
LOAN PORTFOLIO ANALYSIS
Set forth below is selected data relating to the composition
of the Savings Bank's loan portfolio by type of loan on the dates
indicated.
At December 31,
1996 1995 1994 1993 1992
---------------- ---------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
MORTGAGE LOANS AND LOANS HELD (Dollars in Thousands)
FOR SALE:
One- to four-family(1) . . . $123,074 69.68% $129,062 74.05% $115,372 76.57% $86,841 66.28% $84,661 54.21%
Loans held for sale . . . . . 1,137 .64 3,070 1.76 212 0.14 11,794 9.00 34,338 21.99
Multi-family . . . . . . . . 6,433 3.64 6,797 3.90 5,500 3.65 6,959 5.31 5,311 3.40
FHA and VA . . . . . . . . . -- -- -- -- -- -- -- -- 2 0.00
Commercial . . . . . . . . . 15,056 8.52 9,147 5.25 6,742 4.47 5,469 4.17 4,709 3.02
Construction . . . . . . . . 7,710 4.36 7,893 4.53 9,893 6.51 9,526 7.27 15,156 9.71
Land . . . . . . . . . . . . 1,030 .58 1,703 0.98 195 0.13 878 0.67 1,696 1.09
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total mortgage loans and
loans held for sale . . . . 154,440 87.42 157,672 90.47 137,914 91.53 121,467 92.70 145,873 93.42
OTHER LOANS:
Commercial business loans . . 3,622 2.05 2,713 1.56 21 0.01 30 0.02 38 0.02
Consumer loans - secured by
real estate . . . . . . . . 14,176 8.02 10,585 6.07 6,960 4.63 4,538 3.46 5,237 3.35
Guaranteed student loans . . 1,711 .97 831 0.48 3,889 2.58 3,403 2.60 3,125 2.00
Motor vehicle loans . . . . . 1,122 .64 1,388 0.80 961 0.64 702 0.54 865 0.55
Other secured loans . . . . . 902 .51 549 0.31 321 0.21 386 0.29 505 0.33
Unsecured loans . . . . . . . 685 .39 559 0.31 599 0.40 522 0.39 518 0.33
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total other loans . . . . . . 22,218 12.58 16,625 9.53 12,751 8.47 9,581 7.30 10,288 6.50
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans and loans held for
sale . . . . . . . . . . . 176,658 100.00% 174,297 100.00% 150,665 100.00% 131,048 100.00% 156,161 100.00%
------- ======= ------- ======= ------- ======= ------- ======= ------- =======
LESS:
Due to borrowers on
construction loans . . . . 3,651 4,869 5,201 4,155 3,893
Unearned income . . . . . . . (12) 156 196 127 263
Loan loss allowance . . . . . 1,227 810 633 645 571
------- ------- ------- ------- -------
Total loans receivable and
loans held for sale, net . . $171,792 $168,462 $144,635 $126,121 $151,434
======= ======= ======= ======= =======
_____________________
(1) Includes construction loans converted to permanent loans.
13
The following table sets forth the amounts of the Savings
Bank's total loan portfolio in fixed-rate and floating or
adjustable rate loans at the dates indicated.
At December 31,
-----------------------------------------------------------------------
1996 1995 1994
--------------------- ---------------------- ---------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Fixed-rate . . . . . . . . . . $56,826 32% $60,480 35% $58,979 39%
Floating or adjustable rate . . 119,832 68% 113,817 65% 91,686 61%
------- ---- ------- ---- ------- ----
TOTAL . . . . . . . . $176,658 100% $174,297 100% $150,665 100%
======== ==== ======== ==== ======== ====
ONE- TO FOUR-FAMILY RESIDENTIAL LOANS. The primary lending
activity of the Savings Bank has been the granting of mortgage
loans to enable borrowers to purchase existing homes or to
construct new single-family homes. Management believes that this
policy of focusing on single-family residential mortgage loans
has been successful in contributing to interest income while
keeping delinquencies and losses to a minimum. The Savings
Bank's real estate loan portfolio also includes loans on two- to
four-family dwellings.
The Savings Bank presently originates both fixed rate
mortgage loans and ARMs secured by one- to four-family properties
with loan terms of 10 to 30 years. The Wisconsin Variable Rate
Mortgage ("WVRM") had been offered by the Savings Bank from 1979
until 1987. The WVRM is different from other adjustable rate
mortgages because it is not tied to an index and has no interest
rate caps other than applicable usury ceilings. The interest
rates on these loans adjust annually at the Savings Bank's
discretion. At December 31, 1996, the Savings Bank had $9.8
million in WVRMs. The Savings Bank began offering traditional
ARMs, other than WVRMs, in 1987. Currently, these loans have
interest rates that adjust at regular intervals of one year after
an initial one to three-year period of a fixed interest rate
based upon changes in the One Year Treasury Index. At
December 31, 1996, the Savings Bank's ARM portfolio, other than
WVRMs, totaled $105.2 million. The majority of these loans
provide that the amount of any increase or decrease in the
interest rate is limited to two percentage points (upward or
downward) per adjustment period and generally limit to five to
eight percentage points the amount by which the rate can increase
or decrease over the life of the loan. Borrower demand for ARMs
versus fixed-rate mortgage loans is a function of the level of
interest rates, the expectations of changes in the level of
interest rates and the difference between the interest rates and
loan fees offered for fixed-rate mortgage loans and the first
year "teaser rates" and loan fees for ARMs. The relative amount
14
of fixed-rate mortgage loans and ARMs that can be originated at
any time is largely determined by the demand for each in a
competitive environment. During the year ended December 31,
1996, the Savings Bank's total mortgage loan originations were
$56.3 million, of which $18.4 million, or 33%, were subject to
periodic interest rate adjustments and $37.9 million, or 67%,
were long-term, fixed-rate loans. See "-- Loan Originations,
Sales and Purchases."
The Savings Bank underwrites one year ARMs based on the
borrower's ability to repay the loan assuming an interest rate 2%
above the initial note rate, which lessens the likelihood of
future delinquencies and defaults. Three year ARMs are
underwritten at the contract rate.
The Savings Bank originates long-term, fixed-rate loans
under guidelines established by the FHLMC and FNMA, which
facilitates the sale of such loans to FHLMC or FNMA in the
secondary market. The Savings Bank's long-term, fixed-rate loans
are originated with terms of between 10 and 30 years, amortized
on a monthly basis with principal and interest due each month.
In addition, the Savings Bank currently originates 15-year fixed-
rate loans with biweekly payments, and has in the past offered
such loans with maturities up to 30 years resulting in shorter
final maturities of the loans. At December 31, 1996, the Savings
Bank had $8.9 million of such loans in its portfolio. At
December 31, 1996, the Savings Bank had $17.5 million of long-
term, fixed-rate mortgage loans in its portfolio. A
determination is made at the time of origination whether the loan
is held for sale. Currently, the Savings Bank is originating
fixed-rate loans with a maturity greater than 15 years only for
sale in the secondary market. Long-term, fixed-rate loans
intended for sale are hedged with forward commitments to sell the
loans. Accordingly, the Savings Bank is able to minimize
interest rate risk on such loans.
The Savings Bank's lending policies generally limit the
maximum loan-to-value ratio on fixed-rate and adjustable rate
residential mortgage loans to 80% of the lesser of the appraised
value or purchase price of the underlying residential property
unless private mortgage insurance to cover the excess over 80% is
obtained in which case the mortgage is limited to 95% of the
lesser of appraised value or purchase price. The loan-to-value
ratio, maturity and other provisions of the loans made by the
Savings Bank are generally reflected in the policy of making less
than the maximum loan permissible under federal regulations, in
accordance with established lending practices, market conditions
and underwriting standards maintained by the Savings Bank. The
Savings Bank requires title insurance, fire insurance and
extended insurance coverage in connection with all mortgage loans
originated. All of the Savings Bank's real estate loans contain
due on sale clauses, and the Savings Bank obtains appraisals on
all of its real estate loans from outside appraisers.
15
To supplement lending activities in periods of deposit
growth, Oshkosh Savings has increased its investments in
residential mortgage-backed securities during recent years.
Although such securities are generally held for investment, they
can serve as collateral for borrowings and, through repayments,
as a source for liquidity. For information regarding the
amortized cost and market values of the Savings Bank's mortgage-
backed securities portfolio, see Note 3 to Notes to Consolidated
Financial Statements. To supplement originations, the Savings
Bank has also purchased residential loans from time to time. See
"-- Mortgage-Backed Securities" and "-- Loan Originations, Sales
and Purchases."
MULTI-FAMILY RESIDENTIAL LOANS. In addition to originating
one- to four-family residential real estate loans, the Savings
Bank also originates loans secured by multi-family dwelling units
(more than four units). At December 31, 1996, the Savings Bank
had 26 loans that totaled $6.4 million, or 3.6% of the Savings
Bank's gross loan portfolio, secured by multi-family dwelling
units located primarily in the Savings Bank's primary market
area, 7 of which had an outstanding principal balance in excess
of $250,000. At December 31, 1996, the Savings Bank's largest
multi-family residential loan was a $1.8 million loan secured by
a 104-unit apartment complex in the Savings Bank's primary market
area. Multi-family real estate loans are generally originated at
a maximum of 75% of the appraised value of the property or
selling price, whichever is less, and are generally originated
for 10 to 30 year terms with the principal amortized over 25-30
years. Loans secured by multi-family residential real estate are
generally larger and involve a greater degree of risk than one-
to four-family residential mortgage loans, similar to the risks
associated with commercial real estate lending. See
"-- Commercial Real Estate Loans" and "-- Non-Performing Assets
and Delinquencies."
CONSTRUCTION LOANS. The Savings Bank originates residential
construction mortgage loans to residential owner-occupants
(contract construction loans) and to local contractors building
residential properties for resale (speculative construction
loans). The Savings Bank has an approved list of builders that
it does business with and specific maximum approved loan limits
for each builder for speculative construction loans. These loan
limits range from $200,000 to $1.0 million with a maximum loan-
to-value ratio of 80% of the estimated appraised value of the
property as constructed. The speculative construction loans
generally are made with a twelve-month term at a fixed rate of
interest. These are interest only loans during the construction
phase. The contract construction loans generally have an
interest-only term of six months and then are converted to
permanent loans. Extensions are permitted if construction has
continued satisfactorily and if the loan is current and other
circumstances warrant the extension. In some cases, additional
fees are charged for such extensions. Approximately $15.5
million, or 20.9%, of the loans originated by the Savings Bank
16
for the year ended December 31, 1996, were construction loans.
At December 31, 1996, $7.7 million, or 4.4%, of gross loans were
construction loans. Of this amount, $3.3 million, or 43%, were
contract construction loans and $4.4 million, or 57%, were
speculative construction loans. The Savings Bank periodically
originates multi-family and nonresidential construction loans on
a case-by-case basis. The Savings Bank currently does not intend
to materially increase construction loan originations above
historical levels at December 31, 1996.
The Savings Bank intends to continue to grant construction
loans; however, its focus remains on owner-occupied one- to four-
family residential properties in its primary market area.
Construction lending is generally considered to involve a higher
degree of credit risk than long-term financing of residential
properties. The Savings Bank's risk of loss on a construction
loan is dependent largely upon the accuracy of the initial
estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of
construction. If the estimate of construction cost and the
marketability of the property upon completion of the project
prove to be inaccurate, the Savings Bank may be required to
advance additional funds to complete the development. If the
borrower is unable to sell the completed project in a timely
manner or obtain adequate proceeds to repay the loan, the loan
may become nonperforming. Furthermore, if the estimate of value
proves to be inaccurate, the Savings Bank may be confronted, at
or prior to the maturity of the loan, with a property that has a
value insufficient to assure full repayment.
The Savings Bank's underwriting criteria are designed to
evaluate and minimize the risks of each construction loan. Among
other things, the Savings Bank considers evidence of the
availability of permanent financing or a take-out commitment to
the borrower, the reputation of the borrower, the amount of the
borrower's equity in the property, the independent appraisal and
review of cost estimates, the preconstruction sale and leasing
information, and the cash flow projections of the borrower.
COMMERCIAL REAL ESTATE. Commercial real estate loans
totaled $15.1 million, or 8.5% of the Savings Bank's gross loan
portfolio at December 31, 1996, which consisted of 60 loans. Of
these 60 loans, 11 had outstanding principal balances in excess
of $250,000. At December 31, 1996, the Savings Bank's largest
commercial real estate loan was a $2.2 million loan secured by a
shopping center. The Savings Bank originates permanent loans on
commercial real estate up to 75% of the appraised value.
Currently, it is the Savings Bank's philosophy to originate
commercial real estate loans only to selected borrowers known to
the Savings Bank and on properties in its immediate service area.
The Savings Bank's permanent commercial real estate loans are
secured by improved property such as churches, office buildings,
manufacturing, production and retail operations located in the
Savings Bank's primary market area. These loans generally have
17
repayment schedules based upon a 10 to 25-year amortization
schedule and 1 to 5-year final maturity (balloon payment) and are
currently originated with an interest rate that is adjustable or
floats over the Wall Street Prime Index or comparable term
Treasury Index.
Of primary concern in commercial real estate lending is the
borrower's creditworthiness and the feasibility and cash flow
potential of the project. Loans secured by income properties are
generally larger and involve greater risks than residential
mortgage loans because payments on loans secured by income
properties are often dependent on successful operation or
management of the properties. As a result, repayment of such
loans may be subject, to a greater extent than residential real
estate loans, to supply and demand in the market for the type of
property securing the loan and, therefore, may be subject to
adverse conditions in the real estate market or the economy. If
the cash flow from the project is reduced, the borrowers ability
to repay the loan may be impaired. Although the thrift industry
has generally experienced material losses in commercial real
estate lending, Oshkosh Savings has sustained few losses relative
to the size of the entire commercial real estate loan portfolio
or the mortgage loan portfolio at the time.
COMMERCIAL BUSINESS LOANS. Commercial business loans
totaled $3.6 million or 2.1% of the Savings Bank's gross loan
portfolio at December 31, 1996 which consisted of 72 loans. Of
these 72 loans, four had outstanding principal balances in excess
of $250,000. At December 31, 1996, the Savings Bank's largest
commercial business loan was a $1,000,000 loan secured by
inventory. The Savings Bank originates loans both unsecured and
secured. Most loans are secured with business assets such as
inventory, accounts receivable and fixed assets such as
equipment. Business loans consist of working capital lines of
credit, term loans and single payment loans. These loans range
in terms from 90-days to 10-years and are originated with an
interest rate that is adjustable or floats over the Wall Street
prime index or a fixed rate using the comparable term treasury
index.
This type of loan carries the highest risk of all loans in
the Savings Bank's portfolio. A business downturn can render
assets such as inventory, accounts receivable, or equipment
virtually worthless. The Savings Bank manages this risk through
conservative underwriting, including a detailed business plan,
regular contact with the customer, and an annual review of
financial statements and tax returns. Loss reserves of $63,000
or 1.7% of outstanding balances, have been established for
commercial business loans. See "--Loan and REO Loss Allowance
Analysis.".
CONSUMER LOANS. Oshkosh Savings has offered consumer loans
since 1981 and views consumer lending as an important component
of its business operations because consumer loans generally have
18
shorter terms, higher yields or adjustable rates, thus reducing
exposure to changes in interest rates. In addition, Oshkosh
Savings believes that offering consumer loans helps to expand and
create stronger ties to its customer base. At December 31, 1996,
the Savings Bank's consumer loan portfolio was $18.6 million, or
10.5% of the gross loan portfolio. Of this amount, $14.2 million
were loans secured by first or second liens on residential real
estate that the Savings Bank originates using underwriting
standards similar to those utilized with residential first
mortgage loans.
Oshkosh Savings offers a variety of consumer loans,
including loans secured by mortgages on real estate lines of
credit or for home improvement, debt consolidation and other
purposes, loans on automobiles, boats and mobile homes, unsecured
personal loans, student loans and savings account loans. The
Savings Bank has emphasized origination of home equity lines of
credit ("HELOC") loans in 1996. Outstanding balances on HELOC
loans at December 31, 1996, are $2.8 million, with an additional
$2.6 million approved but not used. The rate on HELOC loans is
tied to the prime rate, which is beneficial for interest rate
risk management (see "Asset and Liability Management"). These
lines of credit are generally limited to 80% of the value of the
residence, plus a maximum of $10,000.
Consumer loans have been offered under a variety of terms
and conditions. Secured consumer loans are generally limited to
80% of the retail value of the consumer collateral or real estate
offered to secure the loan, except in the case of savings account
loans where the maximum is limited to 90% of the account balance
and in the case of guaranteed student loans where the amount is
established by the program. Vehicle loans are written to fully
amortize over a term of not more than six years on new or
previously untitled vehicles; the term is reduced on used
vehicles depending upon the age of the vehicle offered as
collateral. Consumer real estate mortgages are written to fully
amortize over a term of not more than 15 years. Savings account
loans are written with a term matching the collateral's maturity
date.
The Savings Bank employs strict underwriting standards for
consumer loans. These procedures include an assessment of the
applicant's payment history on other debts and ability to meet
existing obligations and payments on the proposed loans.
Although the applicant's creditworthiness is a primary
consideration, the underwriting process also includes a
comparison of the value of the security, if any, to the proposed
loan amount.
Consumer loans may entail greater risk than do residential
mortgage loans, particularly in the case of consumer loans that
are unsecured or secured by assets such as automobiles that
depreciate rapidly. In the latter case, repossessed collateral
for a defaulted consumer loan may not provide an adequate source
19
of repayment for the outstanding loan and the remaining
deficiency often does not warrant further substantial collection
efforts against the borrower. In addition, consumer loan
collections are dependent on the borrower's continuing financial
stability and thus are more likely to be adversely affected by
job loss, divorce, illness or personal bankruptcy. Furthermore,
the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the
amount that can be recovered on such loans. Such loans may also
give rise to claims and defenses by the borrower against the
Savings Bank as the holder of the loan, and a borrower may be
able to assert claims and defenses that it has against the seller
of the underlying collateral. The Savings Bank adds a general
provision to its consumer loan loss allowance, based on general
economic conditions and prior loss experience. The Savings Bank
historically has had a low level of delinquencies on its consumer
loans. See "-- Nonperforming Assets and Delinquencies." The
Savings Bank's allowance for consumer loan losses at December 31,
1996, was $295,000, or 1.59% of the total outstanding balance of
such loans.
20
LOAN MATURITY AND REPRICING
The following table sets forth certain information at
December 31, 1996, regarding the dollar amount of scheduled
amortizations in the Savings Bank's loan portfolio. Demand
loans, loans having no stated schedule of repayments and no
stated maturity, and overdrafts are reported as due in one year
or less. Loan balances do not include undisbursed loan proceeds,
unearned discounts, unearned income and allowance for loan
losses.
Within One to Beyond
One Year Five Years Five Years Total
--------- ---------- ---------- -----
(In Thousands)
Mortgage loans . . . . . . . . . . $56,892 $43,846 $29,799 $130,537
Loans held for sale . . . . . . . . 23 160 954 1,137
Construction loans . . . . . . . . 7,710 -- -- 7,710
Consumer loans . . . . . . . . . . 3,975 4,476 10,145 18,576
Commercial loans . . . . . . . . . 7,135 1,742 9,801 18,678
------- ------- ------- -------
Total loans . . . . . . . . . . $75,735 $50,224 $50,699 $176,658
======= ======= ======= =======
The following table sets forth the dollar amount of all
loans due within one year after December 31, 1996, which have
fixed interest rates and floating or adjustable interest rates.
Floating or
Adjustable
Fixed Rates Rates Total
----------- ----- -----
(In Thousands)
Mortgage Loans . . . . . . . . . . . $497 $56,395 $56,892
Loans held for sale . . . . . . . . . 23 -- 23
Construction loans . . . . . . . . . 7,710 -- 7,710
Consumer loans . . . . . . . . . . . 1,333 2,642 3,975
Commercial loans . . . . . . . . . . 4,786 2,349 7,135
------- ------- -------
Total loans . . . . . . . . . . . $14,349 $61,386 $75,735
======= ======= =======
LOAN SOLICITATION AND PROCESSING. Loan originations are
derived from a number of sources such as realtors, builders,
commissioned loan originators, existing customers, referrals and
correspondent banks. Advertising in local newspapers and on
radio and television promotes loan products to the public in
general. The present customer base and walk-in traffic are
solicited through stuffers, brochures and lobby signs and,
21
occasionally, through direct mail. Telephone inquiries are also
used.
Once a mortgage loan application is received, a credit and
property analysis is completed, including obtaining a credit
report from local reporting agencies, verification of income and
deposits through mail or direct contact, assets and liability
verification as required and an appraisal of the property offered
as collateral. Real estate appraisals are completed by board-
approved and certified independent fee appraisers. The
application is then submitted for underwriting to an individual
or individuals who have the appropriate approval authority.
Similarly, consumer loans may be approved only by an individual
or individuals who have the appropriate authority. A schedule of
loan approval authority limits has been established, based on
type of loan, collateral, total outstanding credit exposure of
the borrower, and position and experience level of the employee.
Maximum limits for approval, other than the President are
$100,000 for a real estate mortgage, $50,000 for a secured
consumer loan, and $25,000 for unsecured consumer loan. The
President can approve loans up to $250,000. The Bank Loan
Committee, comprised of the President and three Vice Presidents,
can approve loans up to $600,000. Any loans above $600,000
require Board of Director approval. These lending authority
limits are subject to all regulations and lending policies of the
Savings Bank.
LOAN ORIGINATIONS, SALES AND PURCHASES. Loans are
originated to meet or exceed the applicable underwriting
requirements of the FNMA, FHLMC, Government National Mortgage
Association ("GNMA"), Veterans Administration ("VA"), Wisconsin
Higher Education Corporation ("WHEC"), Wisconsin Housing and
Economic Development Authority ("WHEDA"), Student Loan Marketing
Association, and the Wisconsin Department of Veteran Affairs
("WDVA"). Correspondent relationships have been established in
the past with institutions meeting the asset and liquidity
guidelines of the FNMA and FHLMC. These institutions take
mortgage loan applications at terms and rates established by the
Savings Bank, submit applications to the Savings Bank for
underwriting and approval, close the loans as specified by the
Savings Bank, and deliver properly completed documentation within
a specified period of time. The Savings Bank currently has no
correspondent relationships.
The Savings Bank maintains loan documentation on mortgage
loans as required to sell the loans to FNMA, FHLMC or private
institutions. Loan sales over the past five years have been
whole loan sales, servicing retained and nonrecourse to FHLMC,
FNMA and WDVA. Loans sold have been fixed-rate monthly-payment
and biweekly-payment loans. Loans originated under the Wisconsin
Housing and Economic Development Authority ("WHEDA") first-time
home buyer program have been sold on a whole loan basis to WHEDA
on a nonrecourse basis with servicing released.
22
The Savings Bank sells loans as part of its asset/liability
strategy. The sale of such loans allows the Savings Bank to
continue to make loans during periods when savings flows decline
or funds are not otherwise available for lending purposes;
however, the Savings Bank assumes an increased risk if such loans
cannot be sold in a rising interest rate environment. The
Savings Bank has effectively mitigated this interest rate risk by
originating loans with a forward commitment to sell the loans.
Accordingly, the Savings Bank does not hold a substantial number
of loans for sale in its portfolio without a contract to sell the
loans at a predetermined interest rate. Mortgage loans have been
sold for cash, and servicing of the loans is retained by Oshkosh
Savings, generally on a nonrecourse basis. The total of loans
serviced for others as of December 31, 1996, was $101.8 million.
As required by the Financial Accounting Standards Board, the
Savings Bank has capitalized mortgage servicing rights during
1996 recognizing them as a separate asset. This asset is
amortized in proportion to and over the period of, estimated net
servicing revenues. During 1996 the Savings Bank capitalized
$193,000 of mortgage servicing rights and amortized $32,000 for a
mortgage servicing rights balance as of December 31, 1996 of
$161,000. The mortgage servicing rights asset is reviewed for
impairment on a regular basis by performing an assessment of the
fair market value of those rights using discounted cash flows and
current market interest rates. No impairment of mortgage
servicing rights existed at December 31, 1996.
In addition to selling loans, the Savings Bank has
occasionally purchased in the secondary market real estate loans
secured by one- to four-family residential properties located
outside of its primary market area. The Savings Bank has not
purchased any loans since 1987, and current balances outstanding
are less than $2.0 million as of December 31, 1996. In 1987, the
Savings Bank purchased a package of $5.0 million of ARMs secured
by residential properties located in Connecticut. The book value
of this package was $1.1 million at December 31, 1996. The
Savings Bank's purchases in the secondary market are dependent
upon the demand for mortgage credit in the local market area and
the inflow of funds from traditional sources.
23
The following table shows total loans originated, purchased,
sold and repaid during the periods indicated.
Year Ended December 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
(In Thousands)
Loans receivable-net and loans held for sale at beginning
of period . . . . . . . . . . . . . . . . . . . . . . . . . $168,462 $144,635 $126,121
------- ------- --------
Loans originated:
One- to four-family residential . . . . . . . . . . . 33,549 34,444 41,323
Multi-family residential and commercial real estate . 7,329 2,295 5,576
Construction . . . . . . . . . . . . . . . . . . . . . 15,458 19,608 20,762
Consumer . . . . . . . . . . . . . . . . . . . . . . . 15,202 18,685 7,995
Commercial business loans . . . . . . . . . . . . . . 2,560 3,892 --
------- ------- -------
Total loans originated . . . . . . . . . . . . . 74,098 78,924 75,656
------- ------- -------
Whole loans sold . . . . . . . . . . . . . . . . . . . . . 19,330 5,864 19,686
------- ------- -------
Loan principal repayments . . . . . . . . . . . . . . . . . 51,438 49,233 37,456
------- ------- -------
Net loan activity . . . . . . . . . . . . . . . . . . . . . 3,330 23,827 18,514
------- ------- -------
Loans receivable-net and loans held for sale at end of $171,792 $168,462 $144,635
period . . . . . . . . . . . . . . . . . . . . . . . . . ======== ======== ========
MORTGAGE-RELATED SECURITIES. The Savings Bank invests in
mortgage-backed securities and collateralized mortgage
obligations ("CMOs") and real estate mortgage investment conduits
("REMICs"). At December 31, 1996, the Savings Bank owned
mortgage related securities with an amortized cost of $44.8
million and market value of $44.3 million. Weighted average
yield is 6.55%.
Mortgage backed securities represent a participation
interest in a pool of single-family, multi-family or commercial
mortgages, the principal and interest payments of which are
passed from the mortgage originators through intermediaries that
pool and repackage the participation interest in the form of
securities to investors such as the Savings Bank. Such
intermediaries may include quasi-governmental agencies such as
FHLMC, FNMA and GNMA that guarantee or insure the payment of
principal and interest to investors. Mortgage-backed securities
generally increase the quality of the Savings Bank's assets by
virtue of the guarantees that back them, are more liquid than
individual mortgage loans and may be used to collateralize
borrowings or other obligations of the Savings Bank. At December
24
31, 1996, the Savings Bank had $128,000 in mortgage-backed
securities, or 0.05% of assets.
CMOs and REMICs are typically issued by a special purpose
entity, which may be organized in a variety of legal forms, such
as a trust, a corporation or a partnership. The entity
aggregates pools of pass-through securities or mortgage loans,
which are used to collateralize the mortgage-related securities.
Once combined, the cash flows can be divided into "tranches" or
"classes" of individual securities, thereby creating more
predictable average lives for each security than the underlying
pass-through pools or mortgage loans. Accordingly, under this
security structure all principal paydowns from the various
mortgage pools or mortgage loans are allocated to a mortgage
related securities' class or classes structured to have priority
until it has been paid off. These securities generally have
fixed interest rates, and as a result, changes in interest rates
generally would affect the market value and possibly the
prepayment rates of such securities. The characterization of a
mortgage-related security as a REMIC relates solely to the tax
treatment of the mortgage-related security under the Internal
Revenue Code of 1986, as amended. At December 31, 1996, the
Savings Bank owned $44.2 million of CMO's and REMICs representing
17.3% of assets. None of the CMOs and REMICs owned by the
Savings Bank are principal only, interest only, or residual
classes. The Savings Bank currently holds $33.8 million of
mortgage-backed securities as part of its leveraged investment
program. This program involves borrowing funds from the Federal
Home Loan Bank of Chicago (See "-- Borrowings") and reinvesting
the proceeds in mortgage-backed securities at a positive spread.
The purpose is to improve return on equity. Mortgage-backed
securities may be used as collateral for borrowings and, through
repayments, as a source of liquidity. Management considers
mortgage-backed securities investments to be advantageous since
they offer yields above those available for investments of
comparable credit quality and duration and qualify as thrift
investments under the Qualified Thrift Lender ("QTL") Test.
To assess price volatility, the Federal Financial
Institutions Examination Counsel ("FFIEC") adopted a policy in
1992 that requires an annual "stress" test of mortgage derivative
securities. This policy, which has been adopted by the OTS
pursuant to Thrift Bulletin 52, requires the Savings Bank to
annually test its mortgage-related securities to determine
whether they are "high-risk" securities. Mortgage derivative
securities with an average life or price volatility in excess of
a benchmark 30-year mortgage-backed pass-through security are
considered "high-risk" mortgage securities in order to reduce
interest rate risk. In addition, all "high-risk" mortgage
securities acquired after February 9, 1992, which are classified
as "high-risk" at the time of purchase must be carried in the
institution's trading account or as assets held-for-sale. At
December 31, 1996 the Savings Bank held CMOs and REMICs that did
not meet the criteria established by the FFIEC policy as
25
expressed in Thrift Bulletin 52 and were classified as "high-
risk" with a amortized cost of $5.5 million and a market value of
$5.5 million, representing 2.2% of total assets. None of the
CMOs and REMICs held by the Savings Bank that are classified as
"high-risk" were so classified at the time they were purchased by
the Savings Bank but have become so classified because interest
rates have risen since those fixed rate CMOs and REMICs were
purchased at relatively low interest rates. While the Savings
Bank's current investment policy permits its investment in CMOs
and REMICs classified as "high-risk," it is currently anticipated
that any future investments in "high-risk" securities will be
minimal.
LOAN COMMITMENTS. The Savings Bank issues commitments for
fixed and adjustable rate one- to four-family residential
mortgage loans conditioned upon the occurrence of certain events.
Such commitments are made in writing on specified terms and
conditions and are honored for up to 90 days from approval,
depending on the type of transaction. The Savings Bank had
outstanding net loan commitments of approximately $2.0 million at
December 31, 1996. See Note 16 to Notes to Consolidated
Financial Statements.
LOAN ORIGINATION AND OTHER FEES. The Savings Bank, in some
instances, receives loan origination fees and discount "points."
Loan fees and points are a percentage of the principal amount of
the mortgage loan and are charged to the borrower for funding the
loan. The Savings Bank sometimes charges origination fees of 1%
to 2% on one- to four-family residential real estate loans, long-
term commercial real estate loans and residential construction
loans. Current market conditions preclude charging fees on most
mortgage loans. Current accounting standards require fees
received (net of certain loan origination costs) for originating
loans to be deferred and amortized into interest income over the
contractual life of the loan. Net deferred fees/costs associated
with loans that are sold are recognized as income or expense at
the time of sale. The Savings Bank had $11,000 of net deferred
loan costs at December 31, 1996.
The Savings Bank also receives loan servicing fees on the
loans it sells and on which it retains the servicing
responsibilities.
NONPERFORMING ASSETS AND DELINQUENCIES. When a mortgage
loan borrower fails to make a required payment by the end of the
month in which the payment is due, the Savings Bank generally
institutes collection procedures. The first notice is generally
mailed to the borrower after 15 days of the payment due date and,
if necessary, a second written notice follows at the end of the
month in which that payment was due. Attempts to contact the
borrower by telephone begin approximately five days after the
16th day notice is mailed to the borrower. Attempts to contact
the borrower in person are made after the loan reaches the 45th
day of delinquency. If a satisfactory response is not obtained,
26
continuous follow-up contacts are attempted until the loan has
been brought current. Before the 60th day of delinquency,
attempts to interview the borrower, preferably face-to-face, are
made to establish (i) the cause of the delinquency, (ii) whether
the cause is temporary, (iii) the attitude of the borrower toward
the debt, and (iv) a mutually satisfactory arrangement for curing
the default. In the case of second mortgage loans, all superior
lienholders are contacted to determine (i) the status and unpaid
principal balance of each superior lien, (ii) whether any
mortgage constituting a superior lien has been sold to the FHLMC
or FNMA, and (iii) whether the borrower is also delinquent under
a superior lien and what the affected lienholder intends to do to
resolve the delinquency.
If the borrower's agreement to a repayment plan is
unobtainable or if a repayment plan is breached, the mortgaged
premises is inspected to determine its physical condition and
occupancy status before recommending further servicing action.
Such inspection normally takes place after the 60th day of
delinquency and every month thereafter until satisfactory
repayment arrangements have been made. No later than 90 days
into the delinquency procedure, the Savings Bank notifies the
borrower that home ownership counseling is available for eligible
homeowners. The notice informs the borrower of counseling
provided by the Savings Bank as well as the availability of such
counseling provided by nonprofit organizations.
In most cases, delinquencies are cured promptly; however, if
a delinquency is not cured by the 90th day thereof (or sooner if
the borrower is chronically delinquent) and all reasonable means
of inducing the borrower to pay on time have been exhausted,
foreclosure, deed in lieu of foreclosure or, in the case of a
second mortgage, liquidation according to the terms of the
security instrument and applicable law is generally initiated.
At this time, interest income on loans is reduced by the full
amount of accrued and uncollected interest, unless there are
extenuating circumstances that would indicate that recovery of
the amount due is likely.
When a consumer loan borrower fails to make a required
payment on a consumer loan by the payment due date, the Savings
Bank generally institutes collection procedures. The first
notice is mailed to the borrower 15 days following the payment
due date. If necessary, a second written notice is mailed after
the 30th day of delinquency. A computer-generated collection
record card is received by the Savings Bank on the 21st day
following the payment due date. The customer is contacted by
telephone to ascertain the nature of the delinquency and to offer
counseling services, if required. At this time, the borrower is
notified in writing as to the availability of counseling services
provided by the Savings Bank as well as the availability of such
counseling provided by nonprofit organizations.
27
In most cases, delinquencies are cured promptly; however, if
no progress is made by the 60th day of delinquency, a written
notice is mailed informing the borrowers of their right to cure
the delinquency within 15 days and of the Savings Bank's intent
to begin legal action if the delinquency is not cured. Depending
on the type of property held as collateral, the Savings Bank
either files a judgment in small claims court or takes action to
repossess the collateral.
The status of business loans is monitored on a continual
basis through interim and annual financial statements, personal
visits with the principals of the companies involved, and through
other sources such as credit reports. As potential difficulties
arise, timely and appropriate action to assist the borrower and
correct these problems, if possible, and to protect the bank from
loss are taken.
When the quality of a loan has declined it will be reviewed
for delinquency of payments, adequacy of collateral, borrower's
repayment ability and asset quality rating. A determination is
made for steps to improve the loan, advisability of placing on
non-accrual status, probability of liquidation and potential loan
loss.
Delinquency notices are sent approximately 10-days from the
due date and telephone contacts begin within 5-days after the 16
day late notice is generated. Contact will continue by telephone
and personal face to face interviews to determine (i) the cause
of the delinquency, (ii) whether the cause is temporary, (iii)
the attitude of the borrower toward the debt, and (iv) a mutually
satisfactory arrangement for curing the delinquency.
If the borrower's agreement to a repayment plan is
unobtainable or if a repayment plan is breached, additional
collection action will be taken including inspection of the
collateral and possibly a demand for payment along with steps
necessary to begin foreclosure on the collateral and ultimate
liquidation. Commercial real estate being foreclosed upon will
have an environmental phase I study completed before foreclosure
if conditions suggest it is necessary.
Loans will be put in a non-accrual status where it is not
reasonable to expect that interest will be realized or where a
loan has remained unpaid for 90-days or more unless the loan is
both well secured and in the process of collection. All
previously accrued but uncollected interest is to be charged to
current income provided it does not impact prior years' earnings
in which case it will be charged to loan loss reserves.
The Board of Directors is informed on a monthly basis as to
the status of all loans that are delinquent 60 days or more, as
well as the status of all loans currently in foreclosure and
property owned by the Savings Bank through foreclosure.
28
The table below sets forth the amounts and categories of
nonperforming assets in the Savings Bank's loan portfolio at the
dates indicated. Loans are placed on nonaccrual status when the
loan becomes more than 90 days in arrears and collection of
interest becomes doubtful. If the collection of principal
becomes doubtful on a loan delinquent less than 90 days, the loan
will be put on nonaccrual status. If interest on nonaccrual
loans had been accrued, interest income of approximately $7,000
would have been recorded for the year ended December 31, 1996.
Foreclosed assets include assets acquired in settlement of loans.
For all years presented, the Savings Bank has had no "troubled
debt restructuring" as defined in Statement of Financial
Accounting Standards ("SFAS") No. 15. Other than the loans set
forth in the table below, management is unaware of any additional
loans that cause management to have serious doubts as to the
ability of the borrower to comply with the present loan
repayment terms and may result in management placing the loan on
a nonaccrual status.
The Savings Bank had $60,000 of impaired loans at December 31,
1996, all of which were on a nonaccrual basis. The average
recorded investment in impaired loans during 1996 was approximately
$109,993, for which no interest income was recognized in 1996.
The Savings Bank had no impaired loans at December 31, 1995.
29
At December 31,
---------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- --------
(Dollars in Thousands)
Loans accounted for on a non-accrual basis:
Real estate:
Residential . . . . . . . . . . . . . . $ 487 $ 196 $ 610 $ 338 $ 357
Consumer . . . . . . . . . . . . . . . . 20 -- -- -- --
Commercial . . . . . . . . . . . . . . . 60 -- -- -- --
------ ------ ------ ------ ------
Total nonaccrual loans . . . . . . . 567 196 610 338 357
------ ------ ------ ------ ------
Accruing loans that are contractually past
due 90 days or more:
Real estate:
Residential . . . . . . . . . . . . . . -- 48 133 184 26
Consumer . . . . . . . . . . . . . . . . -- -- 15 17 3
------ ------ ------ ------ ------
Total 90 days past due loans . . . . -- 48 148 201 29
------ ------ ------ ------ ------
Total of nonaccrual and 90 days past due
loans . . . . . . . . . . . . . . . . . . . 567 244 758 539 386
------ ------ ------ ------ ------
Real estate owned and in judgment . . . . . . 0 34 197 174 398
------ ------ ------ ------ ------
Investment in joint venture . . . . . . . . . -- -- -- -- 896
------ ------ ------ ------ ------
Total nonperforming assets . . . . . . . . . $ 567 $ 278 $ 955 $ 713 $1,675
====== ====== ====== ====== ======
Total loans delinquent 90 days or more to net
loans . . . . . . . . . . . . . . . . . . . 0.33% 0.14% 0.52% 0.43% 0.25%
Total loans delinquent 90 days or more to
total assets . . . . . . . . . . . . . . . 0.22% 0.09% 0.32% 0.28% 0.20%
Total nonperforming assets to total assets . 0.22% 0.11% 0.40% 0.38% 0.87%
ASSET CLASSIFICATION. Federal regulations require that the
Savings Bank utilize an internal asset classification system as a
means of reporting problem and potential problem assets. The
Savings Bank has incorporated the OTS internal asset
classifications as a part of its credit monitoring system. The
Savings Bank currently classifies problem and potential problem
assets as "Substandard," "Doubtful" or "Loss" assets. An asset
30
is considered "Substandard" if it is inadequately protected by
the current net worth and paying capacity of the obligor or the
value of any collateral pledged. "Substandard" assets include
those characterized by the "distinct possibility" that the
insured institution will sustain "some loss" if the deficiencies
are not corrected. Assets classified as "Doubtful" have all of
the weaknesses inherent in those classified "Substandard" with
the added characteristic that the weaknesses present make
"collection or liquidation in full", on the basis of currently
existing facts, conditions and values, "highly questionable and
improbable". Assets classified as "Loss" are those considered
"uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss reserve is
not warranted.
When an insured institution classifies one or more assets,
or portions thereof, as Substandard or Doubtful, it is required
to establish a general valuation allowance for loan losses in an
amount deemed prudent by management. General valuation
allowances, which is a regulatory phrase, represent loss
allowances that have been established to recognize the inherent
risk associated with lending activities but which, unlike
specific allowances, have not been allocated to particular
problem assets. When an insured institution classifies one or
more assets, or portions thereof, as "Loss," it is required
either to establish a specific allowance for losses equal to 100%
of the amount of the asset so classified or to charge off such
amount.
At December 31, 1996, the Savings Bank did not have any
major classified assets in excess of $250,000. At December 31,
1996, there were no nonclassified assets that required
classification because management knew about possible credit
problems of borrowers that would cause management to have serious
doubts as to the ability of such borrowers to comply with
existing repayment terms.
At December 31, 1996, 1995 and 1994, the aggregate amounts
of the Savings Bank's classified assets, and of the Savings
Bank's general and specific loss allowances and charge-offs for
the period then ended, were as follows:
At December 31,
--------------------------------------------
1996 1995 1994
------------- ------------ --------------
(In Thousands)
Substandard assets . . . . . . . . . . . . . . . . . . . $624 $282 $996
General loss allowances . . . . . . . . . . . . . . . . . 1,227 810 633
Specific loss allowances:
Real estate owned and in judgment . . . . . . . . . -- 47 --
Charge-offs during period . . . . . . . . . . . . . . . . 152 46 64
31
REAL ESTATE OWNED. Real estate acquired by the Savings Bank
as a result of foreclosure or by deed in lieu of foreclosure is
classified as real estate owned until it is sold. When property
is acquired, the unpaid principal balance of the related loan
plus foreclosure costs are compared to the property's appraised
value. The property is then directly written down to the lower
of cost or fair value. Further decreases in fair value are
charged against earnings. At December 31, 1996, the Savings Bank
had no real estate owned.
ALLOWANCE FOR LOAN LOSSES. The Savings Bank's management
evaluates the need to establish general loss allowances on loans
and other assets each quarter based on estimated future losses.
Such evaluation considers, among other matters, prior loss
experience, economic conditions and overall portfolio quality.
These provisions for losses are charged against earnings in the
year they are established. The Savings Bank charged the
provision for losses on loans $515,000, $198,400 and $30,000, for
the years ended December 31, 1996, 1995 and 1994, respectively.
At December 31, 1996, the Savings Bank had an allowance for
estimated loan losses of $1.2 million, which represented 0.72% of
total loans. Based on past experience and future expectations,
management believes that loan loss allowance was adequate at
December 31, 1996. But, if the underlying facts and
circumstances of the loan portfolio change in the future, the
adequacy of the allowance for loan losses will be addressed and,
if necessary, adjusted accordingly. When a finding is made that
a significant and permanent decline in value has occurred in a
loan or other asset, the loss is charged against the provision
for loan losses.
LOAN AND REO LOSS ALLOWANCE ANALYSIS
In December 1993, the OTS adopted an Interagency Policy
Statement on the Allowance for Loan and Lease Losses. The policy
statement provides guidance on both the responsibilities of
management for the assessment and establishment of an adequate
allowance and guidance for the agencies' examiners to use to
assess institutions' allowance policies and levels. The policy
statement reaffirms the OTS's policy that examiners will
generally accept management's assessment of the adequacy of
allowances when management has (i) effective systems and controls
to identify, monitor and address asset quality problems, (ii)
analyzed all significant factors that affect the collectibility
of the portfolio in a reasonable manner and (iii) established an
acceptable allowance evaluation process that meets the objectives
discussed in the policy statement. The policy statement also
contains guidelines for the establishment of an appropriate level
of allowances as a percentage of total loans. The guidance is
not intended to be used as a "floor" or "ceiling." The
appropriate level of allowances that an institution should have
must be based on institution-specific factors. The Savings
Bank's allowance for loan losses exceeds the amount set forth in
the guidelines.
32
The following table sets forth an analysis of the Savings
Bank's gross allowance for possible loan losses for the periods
indicated. Where specific loan loss reserves have been
established, any difference between the loss allowance and the
amount of loss realized has been charged or credited to current
income. For additional information, see Notes 4 and 6 to Notes
to Consolidated Financial Statements.
Year Ended December 31,
---------------------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- -------
(Dollars in Thousands)
Allowance at beginning of period . . . . . . . $ 857 $ 633 $ 650 $ 581 $ 560
Provision for loan losses . . . . . . . . . . . 515 245 30 90 287
Recoveries:
Residential real estate . . . . . . . . . -- 21 1 2 13
Real estate construction . . . . . . . . . 1 -- 13 -- 5
Consumer . . . . . . . . . . . . . . . . . 6 4 3 3 2
------ ------ ------ ------ ------
Total recoveries . . . . . . . . . . 7 25 17 5 20
------ ------ ------ ------ ------
Charge-offs:
Residential real estate . . . . . . . . . 47 33 63 10 169
Real estate construction . . . . . . . . . 61 -- -- -- 107
Consumer . . . . . . . . . . . . . . . . . 44 13 1 16 10
Other investments . . . . . . . . . . . . -- -- -- -- --
------ ------ ------ ------ ------
Total charge-offs . . . . . . . . . . 152 46 64 26 286
------ ------ ------ ------ ------
Net charge-offs (recoveries) . . . . 145 21 47 21 266
------ ------ ------ ------ ------
Balance at end of period . . . . . . $1,227 $ 857 $ 633 $ 650 $ 581
====== ====== ====== ====== ======
Ratio of allowance to total loans outstanding
at he end of the period . . . . . . . . . . . 0.72% 0.51% 0.44% 0.51% 0.38%
Ratio of net charge-offs to average loans
outstanding during the period . . . . . . . . 0.09% 0.01% 0.04% 0.02% 0.18%
33
LOAN AND REO LOSS ALLOWANCE BY CATEGORY
The following table sets forth the breakdown of the
allowance for loan losses by loan category for the dates
indicated.
At December 31,
--------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ---------------------------- -----------------------------
% of % of % of Loans
As a % of Loans in As a % of Loans in As a % of in
Outstanding Category Outstanding Category Outstanding Category
Loans in to Total Loans in to Total Loans in to Total
Amount Category Loans Amount Category Loans Amount Category Loans
------ -------- ----- ------ -------- ----- ------ -------- -----
(Dollars in Thousands)
Real estate -
Mortgage:
Residential . $ 585 0.44% 74.54% $ 468 0.33% 80.69% $435 0.44% 65.98%
Commercial . . 193 1.28 8.52 134 2.45 6.81 43 0.64 4.47
Construction . . 80 1.03 4.36 39 0.49 4.53 43 0.13 21.08
Consumer . . . . 295 1.59 10.53 165 1.19 7.97 91 0.71 8.47
Commercial
business . . . . 63 1.73 2.05 -- -- -- -- -- --
Unallocated . . . 11 -- -- 4 -- -- 2 -- --
-- -- 47 -- --
Real estate owned ------- -- ------ ------ -- -- ------ -- -----
Total allowance
for loan and
real estate
owned losses . $1,227 100.00% $ 857 100.00% $ 633 100.00%
====== ====== ====== ======= ====== ======
INVESTMENT ACTIVITIES
Savings and loan associations have authority to invest in
various types of liquid assets, including United States Treasury
obligations, securities of various federal agencies and of state
and municipal governments, deposits at the FHLB Chicago,
certificates of deposit of federally insured institutions,
certain bankers acceptances and federal funds. Subject to
various restrictions, such savings institutions may also invest a
portion of their assets in commercial paper, corporate debt
securities and mutual funds, the assets of which conform to the
investments that federally chartered savings institutions are
otherwise authorized to make directly. The Savings Bank may
decide to increase its liquidity above the required levels
34
depending upon the availability of funds and comparative yields
on investments in relation to return on loans.
The Savings Bank is required under federal regulations to
maintain a minimum amount of liquid assets and is also permitted
to make certain other securities investments. See "REGULATION
AND SUPERVISION." The balance of the Savings Bank's investments
in short-term securities in excess of regulatory requirements
reflects management's response to the significantly increasing
percentage of deposits with short maturities. At December 31,
1996, the Savings Bank's regulatory liquidity was 11.2%, which is
well in excess of the required 5%.
Investment decisions are made by the Investment Committee,
which consists of the Savings Bank's President and Vice
President-Finance and Treasurer. The Investment Committee acts
within policies established by the Board of Directors. At
December 31, 1996, the Corporation's investment securities
portfolio totaled approximately $70.3 million. The principal
components consisted of $20.5 million of United States Treasury
and Agency Securities, municipal bonds of $4.6 million, mutual
funds that invest in adjustable rate securities with a value of
$888,000 and mortgage-backed securities with a value of $44.3
million. The mortgage-backed securities that the Savings Bank
owned at December 31, 1996, range in the original principal
amount from $500,000 to $5.8 million. See "-- Lending Activities
- -- Mortgage-Backed Securities." Management believes these
securities represent attractive and limited risk alternatives
relative to other investments due to the wide variety of maturity
and repayment options available. These investments are a part of
the Savings Bank's interest rate risk management strategy and a
supplement to portfolio lending opportunities. For further
information concerning the Savings Bank's investment and
Mortgage-Backed Securities portfolio, see Note 3 of the Notes to
the Consolidated Financial Statements.
35
INVESTMENT SECURITIES ANALYSIS
The following table sets forth the Corporation's investment
securities portfolio at carrying value at the dates indicated.
At December 31,
-----------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ---------------------
Percent Percent Percent
Book of Book of Book of
Value (1) Portfolio Value (1) Portfolio Value (1) Portfolio
--------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
United States government securities . . $20,515 29.18% $16,167 20.31% $22,151 27.22%
Mortgage-backed securities(2) . . . . . 44,336 63.06 49,838 62.61 45,690 56.13
Marketable equity securities . . . . . 895 1.27 9,037 11.35 9,012 11.07
Municipal bonds . . . . . . . . . . . . 4,565 6.49 4,559 5.73 4,544 5.58
------ ------ ------ ------ ------ ------
Total . . . . . . . . . . . . . . . $70,311 100.00% $79,601 100.00% $81,397 100.00%
======= ======= ======= ======= ======= =======
- -------------------------
(1) The market value of the Corporation's securities portfolio
amounted to $70.3 million, $79.6 million and $79.3 million
at December 31, 1996, 1995 and 1994, respectively. As of
December 31, 1995, all investment securities have been
reclassified as available for sale under SFAS 115 and are
carried on the Corporation's books at market value.
(2) The following mortgage-backed securities, issued by other
than the U.S. Government or U.S. Government Agencies, have
an amortized cost of greater than 10% of stockholders'
equity as of December 31, 1996:
Name of Issuer Amortized Cost Market Value
-------------- -------------- ------------
(In Thousands)
Chase Mortgage Finance Corp. $4,744 $4,744
CMC Securities Corp. $5,000 $4,654
36
The following table sets forth the contractual maturities
and weighted average yields of the debt securities in the
Corporation's investment securities portfolio at December 31,
1996.
Less Than One to Five to Over Ten
One Year Five Years Ten Years Years
Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1)
------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
United States government
and Agency securities $5,946(2) 6.40% $14,569 5.95% $ -- -- % $ -- --%
Mortgage-backed
securities(3) . . . 92 8.10 96 8.64 1,332 6.08 42,816 6.55
Municipal bonds . . . -- -- 392 4.78 4,173 4.77 -- --
------ ------- ------ -------
Total . . . . . . . $6,038 $15,057 $5,505 $42,816
====== ======= ====== =======
____________________
(1) Represents the weighted average yield.
(2) Includes $2.4 million of Agency securities that can be
called by the Agency in less than one year. Final
maturities if not called range from 2-5 years.
(3) Maturities for mortgage-backed securities are final maturity
dates; payments are received on a monthly or quarterly
basis, and expected life is shorter.
SUBSIDIARY ACTIVITIES
As a federally-chartered savings bank, Oshkosh Savings
generally may invest up to 3% of its assets in service
corporations, plus an additional 2%, if for community purposes.
See "REGULATION AND SUPERVISION -- New Thrift Subsidiary and
Equity Investment Rules."
OSB Financial owns two companies as first-tier subsidiaries
of the Savings Bank. One of these subsidiaries, OSB Investments,
Inc., was incorporated under Nevada law on March 25, 1996,
commenced operations on April 1, 1996 and is an operating
subsidiary under regulations of OTS. The business purpose of OSB
Investments is to own and manage a portfolio of investment
securities. OSB Investments was capitalized by transferring
mortgage-related securities of $40.4 million and cash of $6,500
from the Savings Bank to the subsidiary. The subsidiary's
employees and operations are located in Nevada. Its Board of
Directors is comprised of one employee of the subsidiary and two
37
executive officers of the Savings Bank. As of December 31, 1996,
OSB Investments had assets totaling $41.6 million and net income
for the nine month period ended December 31, 1996 of $1.3
million.
Oshkosh Financial, Inc. ("OFI"), a Wisconsin corporation,
was re-established in 1996 to sell mutual funds and other non-
traditional products to retail customers through an operating
agreement. OFI had assets of $11,000 at December 31, 1996, and
net income of $644 for the partial year ended December 31, 1996.
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits and loan repayments are the major source
of the Savings Bank's funds for lending and other investment
purposes. Loan repayments are a relatively stable source of
funds while deposit inflows and outflows and loan prepayments are
significantly influenced by general interest rates and money
market conditions. Borrowings may be used on a short-term basis
to compensate for reductions in the availability of funds from
other sources. They may also be used on a longer term basis for
general business purposes.
DEPOSIT ACCOUNTS. Deposits are attracted from within the
Savings Bank's primary market area through the offering of a
broad selection of deposit instruments, including NOW accounts,
money manager accounts, money market index accounts, regular
savings accounts, certificates of deposit and retirement savings
plans. Deposit account terms vary according to the minimum
balance required, the time periods the funds must remain on
deposit and the interest rate, among other factors. In
determining the terms of its deposit accounts, the Savings Bank
considers the rates offered by its competition, profitability to
the Savings Bank, matching deposit and loan products and its
customer preferences and concerns. The Savings Bank generally
reviews its deposit mix and pricing weekly. Management believes
deposits remained relatively stable, between the periods due to
marketing campaigns to promote the Money Market Index account,
introduced in November, 1995, and checking and savings account.
38
DEPOSIT BALANCES AND RATES PAID
The following table sets forth information concerning the
Savings Bank's certificates of deposit and other deposits at
December 31:
1996 1995 1994
-------------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
of Total Nominal of Total Nominal of Total Nominal
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
------ -------- ---- ------ -------- ---- ------ -------- ----
(Dollars in Thousands)
Demand accounts:
Non-interest bearing
demand accounts . . . . . $ 1,462 0.90% 0.00% $730 0.47% 0.00% $92 .06% .00%
NOW Checking . . . . . . . 14,164 8.74% 1.76% 14,303 9.12% 1.36% 11,442 7.23% 1.47%
Regular savings 17,949 11.07% 2.50% 19,381 12.36% 2.50% 22,420 14.15% 2.50%
accounts . . . . . . . .
Money manager deposit 3,830 2.36% 3.50% 4,136 2.64% 3.15% 7,614 4.81% 3.15%
accounts . . . . . . . .
90-day notice savings 1,037 0.64% 3.21% 1,236 0.79% 3.20% 1,992 1.26% 2.75%
accounts . . . . . . . . .
Christmas Clubs . . . . . . . 70 0.04% 2.50% 57 0.04% 2.50% 58 .04% 2.50%
Money Market Index 15,288 9.43% 4.83% 9,756 6.22% 5.47% -- -- --
accounts . . . . . . . . .
Fixed-term
Certificates with
original term of:
One year or less . . . 57,758 35.63% 5.53% 53,358 34.03% 5.83% 64,424 40.69% 4.90%
One year to three years. 30,422 18.77% 5.87% 32,300 20.60% 5.77% 31,274 19.75% 5.50%
Over three years . . . 20,142 12.42% 5.88% 21,525 13.73% 7.41% 19,019 12.01% 7.76%
------- ------- -------- ------- ------- -------
Total deposits . . . . . . . $162,122 100.00% $156,782 100.00% $158,335 100.00%
======== ======= ======== ======= ======== =======
The following table indicates the amount of the
Corporation's jumbo certificates of deposit by time remaining
until maturity as of December 31, 1996. Jumbo certificates of
deposit require minimum deposits of $100,000 and rates paid on
such accounts are negotiable.
39
Certificates of
Maturity Period Deposits
--------------- ---------------
(In Thousands)
Three months or less . . . . . . $ 2,220
Three through six months . . . . 1,193
Six through twelve months . . . . 1,142
777
Over twelve months . . . . . . . ------
$5,332
Total . . . . . . . . . . . ======
TIME DEPOSITS BY RATES
The following table sets forth the certificates of deposit
in the Corporation classified by rates at the dates indicated.
At December 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(In Thousands)
Below 5.00% . . . . . $4,704 $6,017 $53,920
5.00 - 7.00% . . 104,645 101,052 47,198
7.01 - 9.00% . . 10 114 13,599
-------- -------- --------
Total . . . . . . . . $109,359 $107,183 $114,717
======== ======== ========
The following table sets forth the amount and maturities of
certificates of deposit at December 31, 1996.
Amount Due
-------------------------------------------------------------------------------------
Percent
of Total
Less Than 1-2 2-3 3-4 After Certificate
One Year Years Years Years 4-Years Total Accounts
--------- ----- ----- ----- ------- ------ -----------
(In Thousands)
Below 5.00% . . . $ 4,336 $ 368 $ -- $ -- $ -- $4,704 4.30%
5.00-7.00% 67,650 21,586 10,497 4,020 892 104,645 95.69
7.01-9.00% 10 -- -- -- -- 10 .01
------ ------ ------ ------ ------ ------- -------
Total . . . . . . . . $71,996 $21,954 $10,497 $4,020 $ 892 $109,359 $100.00%
======= ======= ======= ====== ====== ======== ========
40
The following table sets forth the savings deposit activity
of the Savings Bank for the periods indicated.
Year Ended December 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(In Thousands)
Beginning balance, savings deposits . . . . . . $156,782 $158,335 $140,784
Net deposits (withdrawals)before interest
credited . . . . . . . . . . . . . . . . . . (2,248) (8,872) 11,973
Interest credited . . . . . . . . . . . . . . . 7,588 7,319 5,578
-------- -------- --------
Ending balance, savings deposits . . . . . . . $162,122 $156,782 $158,335
======== ======== ========
In the unlikely event the Savings Bank is liquidated after
the Savings Bank's conversion to stock form, depositors as of the
conversion date will be entitled to full payment of their deposit
accounts prior to any payment being made to the shareholders of
the Savings Bank, which is the corporation. Substantially all of
the Savings Bank's depositors are residents of the State of
Wisconsin.
BORROWINGS. Savings deposits are the primary source of
funds for the Savings Bank's lending and investment activities
and for its general business purposes. The Savings Bank may rely
upon advances from the Federal Home Loan Bank ("FHLB")-Chicago to
supplement its supply of lendable funds and to meet deposit
withdrawal requirements. Borrowings decreased by $9.2 million in
1996 primarily as a result of the sale of investment securities.
A major use of FHLB advances from prior years, however, was for
leveraged investments. The Savings Bank invested the proceeds
from borrowings in mortgage-backed securities at a positive
spread in order to increase return on equity. At December 31,
1996, $33.8 million of borrowings were used in this manner. The
FHLB-Chicago has served as the Savings Bank's primary borrowing
source. Advances from the FHLB-Chicago are secured by the
Savings Bank's first mortgage loans. At December 31, 1996, the
Savings Bank had $55.2 million of borrowings from the FHLB-
Chicago at a weighted average rate of 5.59%.
The FHLB-Chicago functions as a central reserve bank
providing credit for savings and loan associations and certain
other member financial institutions. As a member, the Savings
Bank is required to own capital stock in the FHLB-Chicago and is
authorized to apply for advances on the security of such stock
and certain of its mortgage loans and other assets (principally
41
securities which are obligations of, or guaranteed by, the United
States) provided certain standards related to creditworthiness
have been met. Advances are made pursuant to several different
programs. Each credit program has its own interest rate and
range of maturities. Depending on the program, limitations on
the amount of advances are based either on a fixed percentage of
an institution's retained earnings or on the FHLB's assessment of
the institution's creditworthiness. Under its current credit
policies, the FHLB-Chicago generally limits advances to 20% of a
member's assets, and short-term borrowings of less than one year
may not exceed 10% of the institution's assets.
The following table sets forth certain information regarding
certain borrowings by the Corporation at the end of and during
the periods indicated:
At December 31,
----------------------------------------------------
(Dollars in Thousands)
1996 1995 1994
--------------- --------------- ---------------
Balance due on FHLB-Chicago Open Line of Credit . . . . . $500 $3,850 $11,100
Rate paid on:
FHLB-Chicago Open Line of Credit . . . . . . . . . . . 6.95% 5.31% 6.35%
For the Year Ended December 31
--------------------------------------------------
(Dollars in Thousands)
1996 1995 1994
-------------- -------------- --------------
Maximum amount of borrowings outstanding at any month
end:
FHLB-Chicago Open Line of Credit . . . . . . . . . . $16,550 $18,700 $11,100
Average short-term borrowings
outstanding with respect to:
FHLB-Chicago Open Line
of Credit . . . . . . . . . . . . . . . . . . . . . . $1,547 $12,241 $4,952
Weighted average rate paid on:
FHLB-Chicago Open Line
of Credit . . . . . . . . . . . . . . . . . . . . . . 5.75% 6.15% 5.34%
42
COMPETITION
The Savings Bank is the third largest financial institution
of the four commercial banks, three savings banks, one large and
several smaller credit unions in the Oshkosh area, based on its
total assets of $255.1 million at December 31, 1996. The Savings
Bank faces strong competition in the attraction of savings
deposits (its primary source of lendable funds) and in the
origination of loans. Its most direct competition for savings
deposits and loans has historically come from other thrift
institutions and from commercial banks located in its primary
market area. Particularly in times of high interest rates, the
Savings Bank has faced additional significant competition for
investors' funds from short-term money market securities and
other corporate and government securities. The Savings Bank's
competition for loans comes principally from other thrift
institutions, commercial banks, mortgage banking companies and
mortgage brokers.
PERSONNEL
As of December 31, 1996, the Savings Bank had 74 full-time
employees and 27 part-time employees. The employees are not
represented by a collective bargaining agreement. The Savings
Bank believes its relationship with its employees is good.
43
REGULATION AND SUPERVISION
---------------------------
GENERAL
The Savings Bank is chartered under federal law by the OTS.
It is a member of the FHLB System, and its deposit accounts are
insured up to legal limits by the FDIC under the SAIF. The OTS
is charged with overseeing and regulating the Savings Bank's
activities and monitoring its financial condition. This
regulatory framework sets parameters for the Savings Bank's
activities and operations and grants the OTS extensive discretion
with regard to its supervisory and enforcement powers and
examination policies. The Savings Bank files periodic reports
with the OTS concerning its activities and financial condition,
must obtain OTS approval prior to entering into certain
transactions or initiating new activities, and is subject to
periodic examination by the OTS to evaluate the Savings Bank's
compliance with various regulatory requirements.
The Corporation is a savings and loan holding company and,
like the Savings Bank, is subject to regulation by the OTS. As
part of this regulation, the Corporation is required to file
certain reports with, and is subject to periodic examination by,
the OTS.
RECENT LEGISLATIVE AND REGULATORY DEVELOPMENTS
During calender year 1996, several new laws and regulations
were adopted that affect savings associations like the Savings
Bank.
DEPOSIT INSURANCE REFORM LEGISLATION. The SAIF and the Bank
Insurance Fund (the "BIF") were required by law to achieve and
maintain a ratio of insurance reserves to total insured deposits
equal to 1.25 percent. The BIF reached this required reserve
ratio during 1995, while some predictions indicated the SAIF
would not reach this target until the year 2002. The SAIF had
not grown as quickly as the BIF for many reasons, but in large
part because almost half of SAIF premiums had to be used to
retire bonds issued by the Financing Corporation ("FICO Bonds")
in the late 1980's to recapitalize the Federal Savings and Loan
Insurance Corporation.
Until 1995, the SAIF and BIF deposit insurance premium rate
schedules had been identical. But in-mid 1995, the FDIC issued
final rules modifying its assessment rate schedules for SAIF and
BIF member institutions. Under the revised schedule, SAIF
members continued to pay assessments ranging from $0.23 to $0.31
per $100 of deposits, while BIF members paid assessments ranging
from zero to $0.27 per $100 of deposits. But the majority of BIF
members paid only the $2,000 minimum annual premium. Thrift
industry representatives argued that this significant premium
44
differential caused savings associations to operate at a
competitive disadvantage to their BIF-insured bank counterparts.
On September 30, 1996, President Clinton signed the Deposit
Insurance Funds Act of 1996 ("DIFA") that was part of the omnibus
spending bill enacted by Congress at the end of its 1996 session.
DIFA mandated that the FDIC impose a special assessment on the
SAIF-assessable deposits of each insured depository institution
at a rate applicable to all such institutions that the FDIC
determined would cause the SAIF to achieve its designated reserve
ratio of 1.25 percent as of October 1, 1996. The assessment was
based on the amount of SAIF-insured deposits owned by each
institution as of March 31, 1995, the record date established in
the original drafts of the legislation. DIFA allowed the FDIC
to exempt any insured institution that it determined to be weak
from paying the special assessment if the FDIC determined that
the exemption would reduce the risk to the SAIF.
DIFA provides that the FDIC may not set semiannual
assessments with respect to SAIF or BIF in excess of the amount
needed to maintain the 1.25 percent designated reserve ratio or,
if the reserve ratio is less than the designated reserve ratio,
to increase the reserve ratio to the designated reserve ratio.
"Oakar" banks (i.e., BIF-member banks holding SAIF deposits)
are eligible for a 20 percent discount from the special
assessment with respect to the SAIF-insured deposits they own,
provided the ratio of SAIF-insured deposits to total deposits
they owned as of June 30, 1995 was 50 percent or, in some cases,
75 percent. Some "Sasser" banks (i.e., SAIF-member banks that
converted to state savings banks or commercial banks) are also
eligible for this reduced assessment rate.
On October 10, 1996, the FDIC adopted a final rule governing
the payment of the SAIF special assessment. The FDIC imposed a
special assessment in the amount of 65.7 basis points, which is
less than the 85-95 basis points estimated during the early
stages of the law's enactment in 1995. The SAIF special
assessment was due by November 27, 1996. The Savings Bank's
portion of this special assessment amounted to $1.05 million.
The Savings Bank accrued this amount in the quarter ended
September 30, 1996, as mandated by the Financial Accounting
Standards Board that ruled that the SAIF special assessment
should be recorded as an ordinary non-interest expense for the
quarter ended September 30, 1996. The assessment was paid in
November, 1996. DIFA also confirmed that the special assessment
is tax deductible.
In response to the recapitalization of the SAIF, the FDIC
announced on December 11, 1996 that deposit insurance rates for
most savings associations insured under the SAIF would be lowered
to zero effective January 1, 1997. BIF-insured institutions
would also no longer have to pay the $2,000 minimum for deposit
45
insurance, thereby equalizing deposit premiums for savings
associations and banks.
MERGER OF SAIF AND BIF. DIFA mandates the merger of the
SAIF and BIF, effective January 1, 1999, but only if no insured
depository institution is a savings association on that date.
The combined deposit insurance fund will be called the "Deposit
Insurance Fund", or "DIF".
FICO BOND PAYMENTS. Before DIFA, federal regulators and
thrift industry trade groups were predicting that a default would
occur on the FICO Bonds as early as 1998, as SAIF-assessable
deposits continued to decline. DIFA amends The Federal Home Loan
Bank Act to impose the FICO assessment against both SAIF and BIF
deposits beginning after December 31, 1996. But the assessment
imposed on insured depository institutions with respect to any
BIF-assessable deposit will be assessed at a rate equal to one-
fifth of the rate (approximately 1.3 basis points) of the
assessments imposed on insured depository institutions with
respect to any SAIF-assessable deposit (approximately 6.7 basis
points). The FICO assessment for 1996 was paid entirely by
SAIF-insured institutions. BIF-insured banks will pay the same
FICO assessment as SAIF-insured institutions beginning as of the
earlier of December 31, 1999 or the date as of which the last
savings association ceases to exist.
DEPOSIT SHIFTING. DIFA provides that until the earlier of
December 31, 1999 or the date as of which the last savings
association ceases to exist, the Office of the Comptroller of the
Currency (the "OCC"), the FDIC, the Board of Governors of the
Federal Reserve System, and the OTS will take appropriate
actions, including enforcement actions and denial of
applications, to prevent insured depository institutions from
facilitating or encouraging the shifting of deposits from SAIF-
assessable deposits to BIF-assessable deposits for the purpose of
evading the assessments imposed on insured depository
institutions with respect to SAIF-assessable deposits.
BAD DEBT RECAPTURE. The Small Business Job Protection Act
of 1996, signed by President Clinton on August 20, 1996, removed
a significant tax obstacle for savings associations that desire
to become commercial banks. It also eliminated a potential
impediment to business combinations between banks and thrifts and
the creation of a new depository institution charter.
Before this new law, savings associations that converted to
commercial banks had to change their method of accounting for bad
debt reserves, which forced a recapture of the savings
association's untaxed bad debt reserves into taxable income.
Under prior law, savings associations were allowed to use the
reserve method for establishing bad debt reserves. This meant in
recent years they could deduct up to 8 percent of their taxable
income each year as a charge for bad debts, regardless of their
actual loan loss experience. Since the 1950's, this deduction
46
has steadily declined from its initial rate of 100 percent.
These annual deductions resulted in significant tax savings for
savings associations and an accumulation by savings associations
of untaxed income.
Under the new law, a savings association's base-year
reserves established before 1988 will not be taxed should it
convert to a commercial bank. But reserves created after 1987
would be recaptured into taxable income ratably over six years
(beginning with the first tax year after December 31, 1995)
whether or not a savings association converts to a commercial
bank. The recapture amount for the Savings Bank is $412,000.
Recapture of post-1987 reserves may be deferred until after
January 1, 1998 if the savings association maintains a high level
of residential loan originations. In the future, all savings
associations must account for bad debts under tax rules
applicable to commercial banks.
RELAXATION OF THE QUALIFIED THRIFT LENDER TEST. In
September 1996, the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 became law (the "Economic Growth Act of
1996"). In the past, savings associations were required to
satisfy a qualified thrift lender test ("QTL" test) by
maintaining 65 percent of their portfolio assets (defined as all
assets minus intangible assets, property used by the association
in conducting its business and liquid assets equal to 20% of
total assets) in certain "qualified thrift investments"
(primarily residential mortgages and related investments,
including certain mortgage-backed securities) on a monthly basis
in nine out of every twelve months.
The Economic Growth Act of 1996 liberalized the QTL test for
savings associations by permitting them to satisfy a similar-but-
different 60 percent asset test under the Internal Revenue Code.
Alternatively, savings associations may meet the QTL test by
satisfying a more liberal 65 percent asset test that allows an
institution to include small business, credit card and education
loans as qualified investments for purposes of the test.
Furthermore, consumer loans now count as qualified thrift
investments up to 20 percent of portfolio assets. On November
27, 1996, OTS issued an interim final rule that implements
provisions of the Economic Growth Act of 1996, including the
amended QTL test.
INCREASED COMMERCIAL AND CONSUMER LENDING AUTHORITY. Before
the Economic Growth Act of 1996, federal savings associations
were able to lend up to 10 percent of their assets in commercial
business loans (i.e., secured or unsecured loans for commercial,
corporate, business, or agricultural purposes) and, subject to
OTS approval for a higher amount, up to 400 percent of their
capital in commercial real estate loans. In addition, federal
savings associations were permitted to make consumer loans (i.e.,
loans for personal, family or household purposes) in an amount
not to exceed 35 percent of their assets.
47
The Economic Growth Act of 1996 amended the commercial-
lending-asset limit by increasing the ceiling from 10 percent to
20 percent, but provides that amounts in excess of 10 percent may
be used only for small business loans. Moreover, the new law
exempts credit card and educational loans from any percentage of
asset limitations applicable to consumer loans. The interim final
rule issued by the OTS on November 27, 1996, defines a "small
business loan" as one which meets the Small Business
Administration size eligibility standards. This definition also
applies for purposes of the new QTL test.
Effective October 30, 1996, the OTS (as part of its
regulatory streamlining project) amended its lending regulations
for federal savings associations to remove the requirement that
commercial loans made at the service corporation level be
aggregated with the 10 percent of assets limit on commercial
lending.
CHARTER OVERHAUL. Proposals to eliminate the savings
association charter have been considered by the U.S. Congress
several times in recent years. DIFA mandates that the Secretary
of the Treasury conduct a study of all issues which the
Secretary considers to be relevant with respect to the
development of a common charter for all insured depository
institutions and the abolition of separate and distinct charters
between banks and savings associations.
The Secretary of the Treasury must submit a report to the
Congress on or before March 31, 1997, containing the findings and
conclusions of the Secretary in connection with this study. The
report must include a detailed analysis of each issue the
Secretary considers relevant to the subject of the study,
recommendations of the Secretary with regard to the establishment
of a common charter for insured depository institutions and such
recommendations for legislative and administrative action as the
Secretary determines to be appropriate to implement the
recommendations of the Secretary.
REGULATORY RELIEF FOR THRIFTS AND BANKS. The Economic
Growth Act of 1996 included dozens of changes to financial
institution laws granting regulatory relief to financial
institutions (including savings associations) and simplifying and
streamlining the regulatory application process with respect to
certain transactions. Many existing laws were affected by the
new legislation, including the Truth in Lending Act (the "TILA"),
the Real Estate Settlement Procedures Act, the Truth in Savings
Act, the Fair Credit Reporting Act, the Home Mortgage Disclosure
Act and Fair Lending, among others. In particular, the new law
expands the definition of a small depository institution that
qualifies for an extended examination cycle (18 rather than 12
months) to include institutions with assets of $250 million (as
opposed to the former $175 million asset threshold).
48
ENVIRONMENTAL LIABILITY REFORM. On September 30, 1996,
President Clinton signed into law amendments to the Comprehensive
Environmental Response Compensation and Liability Act ("CERCLA").
These amendments provide relief for lenders in connection with
their liability for environmental contamination in making and
administering loans.
OVERHAUL OF THRIFT CONFLICT OF INTEREST, CORPORATE
OPPORTUNITY AND CORPORATE GOVERNANCE RULES. For several years
the OTS has been engaged in an extensive review of its
regulations to identify regulations that are obsolete and areas
where regulatory streamlining is appropriate. This review has
culminated in several substantial revisions to OTS regulations.
In 1996, the OTS issued final regulations streamlining its
regulations in the areas of lending and investment authority,
corporate governance, subsidiaries and equity investments and
conflicts of interest, among others. As a result of this
project, many OTS regulations have been removed from the OTS
Thrift Activities Handbook.
NEW THRIFT SUBSIDIARY AND EQUITY INVESTMENT RULES. On
December 18, 1996, the OTS issued a final rule updating and
streamlining its regulations governing subsidiary and equity
investments. The regulation recasts operating subsidiaries and
service corporations as "subordinate organizations," revises the
list of permissible activities for service corporations, confirms
federal preemption of state law regarding the activities of
operating subsidiaries and clarifies the application process for
establishing subordinate organizations. The new rule also
codifies the authority of a federal savings association to invest
in certain pass-through investments, such as limited partnerships
and mutual funds.
FEDERAL-SAVINGS-ASSOCIATION REGULATION
BUSINESS ACTIVITIES. The activities of savings associations
are governed by the Home Owners' Loan Act, as amended (the
"HOLA"), and, in certain respects, the Federal Deposit Insurance
Act (the "FDI Act"). The HOLA and the FDI Act were amended by
the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA") and the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). FIRREA was enacted for the
purpose of resolving problem savings associations, establishing a
new thrift insurance fund, reorganizing the regulatory structure
applicable to savings associations, and imposing bank-like
standards on savings associations. FDICIA, among other things,
requires that federal banking regulators intervene promptly when
a depository institution experiences financial difficulties,
mandates the establishment of a risk-based deposit insurance
assessment system and requires imposition of numerous additional
safety and soundness operational standards and restrictions.
FIRREA and FDICIA both contain provisions affecting numerous
aspects of the operations and regulations of federally-insured
savings associations and empowers the OTS and the FDIC, among
49
other agencies, to promulgate regulations implementing its
provisions.
BRANCHING. A federally-chartered savings association, like
the Savings Bank, can establish branches in any state or states
in the United States and its territories, subject to a few
exceptions. The exercise by the OTS of its authority to permit
interstate branching by federal savings associations is
preemptive of any state law purporting to address the subject of
branching by a federal savings association.
LOANS TO ONE BORROWER. Under HOLA, savings associations are
generally subject to the national bank limits regarding loans to
one borrower. Generally, savings associations may not make a
loan or extend credit to a single or related group of borrowers
in excess of 15 percent of the association's unimpaired capital
and surplus, where the borrowing is not fully secured by readily-
marketable collateral. An additional amount may be lent, equal
to 10 percent of the association's unimpaired capital and
surplus, if such additional borrowing is secured by readily-
marketable collateral at least equal to the amount of such
additional funds. At December 31, 1996, the Savings Bank had no
outstanding loans or commitments that exceeded the loans to one
borrower limit at the time made or committed.
BROKERED DEPOSITS. Well-capitalized savings associations
that are not troubled are not subject to brokered deposit
limitations. Adequately-capitalized associations are able to
accept, renew or roll over brokered deposits but only (i) with a
waiver from the FDIC and (ii) subject to the limitation that they
do not pay an effective yield on any such deposit that exceeds by
more than (a) 75 basis points the effective yield paid on
deposits of comparable size and maturity in such association's
normal market area for deposits accepted in its normal market
area or (b) 120 basis points of the current yield on similar
maturity U.S. Treasury obligations or, in the case of any deposit
at least half of which is uninsured, 130 percent of such Treasury
yield. Undercapitalized associations are not permitted to accept
brokered deposits and may not solicit deposits by offering an
effective yield that exceeds by more than 75 basis points the
prevailing effective yields on insured deposits of comparable
maturity in the association's normal market area or in the market
area in which such deposits are being solicited. The Savings Bank
is not presently soliciting brokered deposits.
ENFORCEMENT. Under the FDI Act, the OTS has primary
enforcement responsibility over savings associations and has the
authority to bring enforcement action against all "institution-
related parties," including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly
participate in wrongful action likely to have an adverse effect
on an insured association. Civil penalties cover a wide range of
violations and actions. Criminal penalties for most financial
association crimes include fines and imprisonment. In addition,
50
regulators have substantial discretion to impose enforcement
action on an association that fails to comply with its regulatory
requirements, particularly with respect to amounts of capital.
Possible enforcement action ranges from requiring the preparation
of a capital plan or imposition of a capital directive to
receivership, conservatorship or the termination of deposit
insurance. Under the FDI Act, the FDIC has the authority to
recommend to the Director of OTS enforcement action be taken with
respect to a particular savings association. If action is not
taken by the Director, the FDIC has authority to take enforcement
action under certain circumstances.
ASSESSMENTS. Savings associations are required by OTS
regulation to pay assessments to the OTS to fund the operations
of the OTS. The general assessment paid on a semi-annual basis
is computed based upon the savings association's total assets,
including consolidated subsidiaries, as reported in the
association's latest quarterly thrift financial report.
FEDERAL HOME LOAN BANK SYSTEM. The Savings Bank is a member
of the FHLB System, which consists of 12 regional FHLB's. The
FHLB provides a central credit facility primarily for member
associations. The Savings Bank, as a member of the FHLB-Chicago,
is required to acquire and hold shares of capital stock in that
FHLB in an amount at least equal to 1 percent of the aggregate
principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its
advances (borrowings) from the FHLB-Chicago, whichever is
greater. The Savings Bank is in compliance with this
requirement, with an investment in FHLB-Chicago stock at December
31, 1996, of $3.2 million. FHLB advances must be secured by
specified types of collateral.
OTS CAPITAL REQUIREMENTS. The OTS capital regulations
require savings associations to meet three capital standards: a
1.5 percent tangible capital standard, a 3 percent leverage ratio
(or core capital ratio) and an 8 percent risk-based capital
standard.
Tangible capital is defined as common stockholders' equity
(including retained earnings), noncumulative perpetual preferred
stock and related earnings, certain nonwithdrawable accounts and
pledged deposits of mutual savings associations, and minority
interests in equity accounts of fully consolidated subsidiaries,
less intangible assets (other than certain mortgage servicing
rights) and certain equity and debt investments in nonqualifying
subsidiaries (as hereinafter defined).
Core capital is defined as common stockholders' equity
(including retained earnings), certain noncumulative perpetual
preferred stock and related surplus, minority interests in equity
accounts of consolidated subsidiaries, certain nonwithdrawable
accounts and pledged deposits of mutual savings associations,
certain amounts of goodwill resulting from prior regulatory
51
accounting practices, less intangible assets (other than certain
mortgage servicing rights) and certain equity and debt
investments in nonqualifying subsidiaries.
The OTS capital regulation requires that in meeting the
leverage ratio, tangible and risk-based capital standards,
savings associations must deduct investments in and loans to
subsidiaries engaged in activities not permissible for a national
bank (a "nonqualifying subsidiary"). At December 31, 1996, the
Savings Bank did not own a nonqualifying subsidiary.
In April 1991, the OTS issued a proposal to amend its
regulatory capital regulation to establish a 3 percent leverage
ratio (defined as the ratio of core capital to adjusted total
assets) for associations in the strongest financial and
managerial condition, with a 1 CAMEL Rating (the highest rating
of the OTS for savings associations). For all other
associations, the minimum core capital leverage ratio would be 3
percent plus at least an additional 100 to 200 basis points. In
determining the amount of additional capital under the proposal,
the OTS would assess both the quality of risk management systems
and the level of overall risk in each individual association
through the supervisory process on a case-by-case basis.
Associations that failed the new leverage ratio would be required
to file with the OTS a capital plan that details the steps they
would take to reach compliance. If enacted in final form as
proposed, management does not believe that the proposed
regulation would have a material effect on the Savings Bank.
Although the OTS has not adopted this regulation in final
form, generally a savings association that has a leverage capital
ratio of less than 4 percent will be deemed to be
"undercapitalized" under the OTS prompt corrective action
regulations and consequently can be subject to various
limitations on activities.
The OTS' risk-based capital standard requires that savings
associations maintain a ratio of total capital (which is defined
as core capital and supplementary capital) to risk-weighted
assets of 8 percent. In calculating total capital, a savings
association must deduct reciprocal holdings of depository
institution capital instruments, all equity investments and that
portion of land loans and nonresidential construction loans in
excess of 80 percent loan-to-value ratio and its interest rate
risk component (as discussed below), in addition to the assets
that must be deducted in calculating core capital. In
determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a
risk-weight of 0 percent to 100 percent, as assigned by the OTS
capital regulation based on the risks OTS believes are inherent
in the type of asset.
The components of core capital are equivalent to those
discussed above under the 3 percent leverage standard. The
52
components of supplementary capital include cumulative preferred
stock, long-term perpetual preferred stock, mutual capital
certificates, certain nonwithdrawable accounts and pledged
deposits, certain net worth certificates, income capital
certificates, certain perpetual subordinated debt, mandatory
convertible subordinated debt, certain intermediate-term
preferred stock, certain mandatorily redeemable preferred stock
and allowance for loan and lease losses (up to 1.25 percent of
risk-weighted assets). Allowance for loan and lease losses
includable in supplementary capital is limited to a maximum of
1.25 percent. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100 percent of core capital.
At December 31, 1996, the Savings Bank met each of its capital
requirements.
FDICIA required that the OTS (and other federal banking
agencies) revise risk-based capital standards, with appropriate
transition rules, to ensure that they take account of interest
rate risk, concentration of risk and the risks of nontraditional
activities.
The OTS' interest rate risk component became effective on
January 1, 1994. Under the rule, savings associations with
"above normal" interest rate risk exposure would be subject to a
deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's
interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between
incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result
from a hypothetical 200-basis point increase or decrease in
market interest rates (except when the three-month Treasury bond
equivalent yield falls below 4%, then the decrease would be equal
to one-half of that Treasury rate) divided by the estimated
economic value of the association's assets, as calculated in
accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk exposure exceeds 2%
must deduct an interest rate component in calculating its total
capital under the risk-based capital rule. The interest rate
risk component is an amount equal to one-half of the difference
between the association's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's
assets. That dollar amount is deducted from an association's
total capital in calculating compliance with its risk-based
capital requirement. Savings associations with assets of less
than $300 million and risk-based capital ratios in excess of 12%
are not subject to the interest rate risk component. The rule
also provides that the Director of the OTS may waive or defer an
association's interest rate risk component. The OTS has
postponed the date that the risk component will first be deducted
from an institution's total capital to allow, among other things,
the OTS to evaluate the interest rate risk proposals issued by
the other banking agencies.
53
LIQUIDITY. The Savings Bank is required to maintain an
average daily balance of liquid assets (e.g. cash, accrued
interest on liquid assets, certain time deposits, savings accounts,
bankers' acceptances, specified United States Government, state or
federal agency obligations, shares of certain mutual funds and certain
corporate debt securities and commercial paper) equal to not less
than a specified percentage of the average daily balance of its
net withdrawal deposit accounts plus short-term borrowings. This
liquidity requirement may be changed from time to time by the OTS
to any amount within the range of 4 percent to 10 percent
depending upon economic conditions and the savings flows of
member associations; this requirement is currently 5 percent.
OTS regulations also require each member savings association to
maintain an average daily balance of short-term liquid assets at
a specified percentage (currently 1 percent) of the average daily
balance of its net withdrawable deposit accounts and borrowings.
The OTS may initiate enforcement actions for failure to meet
these liquidity requirements. The Savings Bank has never been
subject to monetary penalties for failure to meet its liquidity
requirements.
INSURANCE OF DEPOSIT ACCOUNTS. FDICIA required the FDIC to
establish a risk-based assessment system for insured depository
associations that takes into account the risks attributable to
different categories and concentrations of assets and
liabilities. Under the rule, the FDIC assigns an association to
one of three capital categories consisting of (i) well
capitalized, (ii) adequately capitalized or (iii)
undercapitalized, and one of three supervisory subcategories.
The supervisory subgroup to which an association is assigned is
based on a supervisory evaluation provided to the FDIC by the
association's primary federal regulator and information which the
FDIC determines to be relevant to the association's financial
condition and the risk posed to the deposit insurance funds
(which may include, if applicable, information provided by the
association's state supervisor). An association's assessment
rate depends on the capital category and supervisory category to
which it is assigned. There are nine assessment risk
classifications (i.e., combinations of capital groups and
supervisory subgroups) to which different assessment rates are
applied. Assessment rates range from 23 basis points for an
association in the highest category (i.e., well-capitalized and
healthy) to 31 basis points for an association in the lowest
category (i.e., undercapitalized and of substantial supervisory
concern).
LIMITATION ON CAPITAL DISTRIBUTIONS. The OTS regulations
impose limitations upon all capital distributions by savings
associations, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another
association in a cash-out merger and other distributions charged
against capital. The regulations establish three tiers of
54
associations. An association that exceeds all fully phased-in
capital requirements before and after the proposed capital
distribution ("Tier 1 Association") and has not been advised by
the OTS that it is in need of more than normal supervision,
could, after prior notice but without the approval of the OTS,
make capital distributions during a calendar year up to the
higher of (a) 100 percent of its net income to date during the
calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully
phased-in capital requirements) at the beginning of the calendar
year or (b) 75 percent of its net reserve over the most recent
four-quarter period. Any additional capital distributions would
require prior regulatory approval. In computing the
association's permissible percentage of capital distributions,
previous distributions made during the prior four quarter period
must be included. As of December 31, 1996, the Savings Bank met
the requirements of a Tier 1 Association. In the event the
Savings Bank's capital fell below its fully phased-in requirement
or the OTS notified it that it was in need of more than normal
supervision, the Savings Bank's ability to make capital
distributions could be restricted. In addition, the OTS could
prohibit a proposed capital distribution by any association,
which would otherwise be permitted by regulation, if the OTS
determines that such distribution would constitute an unsafe or
unsound practice. Moreover, under the OTS prompt corrective
action regulations, the Savings Bank would be prohibited from
making any capital distribution if, after the distribution, the
Savings Bank would have, (i) total risk-based capital ratio of
less than 8 percent, (ii) Tier 1 risk-based capital ratio of less
than 4 percent, or (iii) a leverage ratio of less than 4 percent
or has a leverage ratio that is less than 3 percent if the
association is rated composite 1 under the CAMEL rating system in
the most recent examination of the association and is not
experiencing or anticipating significant growth.
COMMUNITY REINVESTMENT. The OTS, the FDIC, the Federal
Reserve Board and the OCC have jointly issued a final rule (the
"Final Rule") under the Community Reinvestment Act (the "CRA").
The Final Rule eliminates the existing CRA regulation's twelve
assessment factors and substitutes a performance based evaluation
system. The Final Rule will be phased in over a period of time
and become fully effective by July 1, 1997. Under the Final
Rule, an institution's performance in meeting the credit needs of
its entire community, including low- and moderate-income areas,
as required by the CRA, will generally be evaluated under three
tests: the "lending test," the "investment test," and the
"service test."
The lending test analyzes lending performance using five
criteria: (i) the number and amount of loans in the institution's
assessment area, (ii) the geographic distribution of lending,
including the proportion of lending in the assessment area, the
dispersion of lending in the assessment area, and the number and
amount of loans in low-, moderate-, middle-, and upper-income
55
areas in the assessment area, (iii) borrower characteristics,
such as the income level of individual borrowers and the size of
businesses or farms, (iv) the number and amount, as well as the
complexity and innovativeness of an institution's community
development lending and (v) the use of innovative or flexible
lending practices in a safe and sound manner to address the
credit needs of low- or moderate-income individuals or areas.
The investment test analyzes investment performance using four
criteria: (i) the dollar amount of qualified investments, (ii)
the innovativeness or complexity of qualified investments, (iii)
the responsiveness of qualified investments to credit and
community development needs, and (iv) the degree to which the
qualified investments made by the institution are not routinely
provided by private investors. The service test analyzes service
performance using six criteria: (i) the institution's branch
distribution among low-, moderate-, middle-, and upper-income
areas, (ii) its record of opening and closing branches,
particularly in low- and moderate-income areas, (iii) the
availability and effectiveness of alternative systems for
delivering retail banking services, (iv) the range of services
provided in low-, moderate-, middle- and upper-income areas and
extent to which those services are tailored to meet the needs of
those areas, (v) the extent to which the institution provides
community development services, and (vi) the innovativeness and
responsiveness of community development services provided.
An independent financial institution with assets of less
than $250 million, or a financial institution with assets of less
than $250 million that is a subsidiary of a holding company with
assets of less than $1 billion, will be evaluated under a
streamlined assessment method based primarily on its lending
record. The streamlined test considers an institution's loan-to-
deposit ratio adjusted for seasonal variation and special lending
activities, its percentage of loans and other lending related
activities in the assessment area, its record of lending to
borrowers of different income levels and businesses and farms of
different sizes, the geographic distribution of its loans, and
its record of taking action, if warranted, in response to written
complaints. In lieu of being evaluated under the three
assessment tests or the streamlined test, a financial institution
can adopt a "strategic plan" and elect to be evaluated on the
basis of achieving the goals and benchmarks outlined in the
strategic plan.
TRANSACTIONS WITH RELATED PARTIES. The Savings Bank's
authority to engage in transactions with related parties or
"affiliates," (i.e., any company that controls or is under common
control with an association) including the Corporation and its
non-savings-association subsidiaries or to make loans to certain
insiders, is limited by Sections 23A and 23B of the Federal
Reserve Act ("FRA"). Subsidiaries of a savings association are
generally exempted from the definition of "affiliate." Section
23A limits the aggregate amount of transactions with any
individual affiliate to 10 percent of the capital and surplus of
56
the savings association and also limits the aggregate amount of
transactions with all affiliates to 20 percent of the savings
association's capital and surplus. Certain transactions with
affiliates are required to be secured by collateral in an amount
and of a type described in the FRA and the purchase of low
quality assets from affiliates is generally prohibited. Section
23B provides that certain transactions with affiliates, including
loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially
the same or at least as favorable to the association as those
prevailing at the time for comparable transactions with non-
affiliated companies. In the absence of comparable transactions,
such transactions may only occur under terms and circumstances,
including credit standards, that in good faith would be offered
to or would apply to non-affiliated companies. Notwithstanding
Sections 23A and 23B, FIRREA prohibits any savings association
from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies under Section 4(c)
of the Bank Holding Company Act ("BHC Act"). Further, no savings
association may purchase the securities of any affiliate other
than a subsidiary.
The Savings Bank's authority to extend credit to executive
officers, directors and 10 percent shareholders, as well as such
entities such persons control are currently governed by Section
22(g) and 22(h) of the FRA and Regulation O promulgated by the
Federal Reserve Board. Among other things, these regulations
require such loans to be made on terms substantially similar to
those offered to unaffiliated individuals, place limits on the
amount of loans the Savings Bank may make to such persons based,
in part, on the Savings Bank's capital position, and require
certain approval procedures to be followed. OTS regulations,
with the exception of minor variations, apply Regulation O to
savings associations.
PROMPT CORRECTIVE REGULATORY ACTION. FDICIA establishes a
system of prompt corrective action to resolve the problems of
undercapitalized associations. Under this system, the OTS is
required to take certain supervisory actions against
undercapitalized associations, the severity of which depends upon
the association's degree of undercapitalization. Generally,
subject to a narrow exception, FDICIA requires the OTS to appoint
a receiver or conservator for an association that is critically
undercapitalized. FDICIA authorizes the OTS to specify the ratio
of tangible equity to assets at which an association becomes
critically undercapitalized and requires that ratio be no less
than 2 percent of assets.
Under OTS regulations, a savings association is considered
to be undercapitalized if it has risk-based capital of less than
8 percent or has a Tier 1 risk-based capital ratio that is less
than 4 percent or has a leverage ratio that is less than 4
percent or has a leverage ratio less than 3 percent if the
savings association is rated composite 1 under the CAMEL rating
57
system in the most recent examination of the association. A
savings association that has risk-based capital less than 6
percent or a Tier 1 risk-based capital ratio that is less than 3
percent or a leverage ratio that is less than 3 percent would be
considered to be "significantly undercapitalized." A savings
association that has a tangible equity to total assets ratio
equal to or less than 2 percent would be deemed to be "critically
undercapitalized." Generally, a capital restoration plan must be
filed with the OTS within 45 days of the date an association
receives notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. In addition,
numerous mandatory supervisory actions become immediately
applicable to the association, including, but not limited to,
restrictions on growth, investment activities, capital
distributions, and affiliate transactions. In addition, the OTS
could issue a capital directive to the savings association that
includes additional discretionary restrictions on the savings
association.
REAL ESTATE LENDING STANDARDS. The OTS and the other
federal banking agencies have uniform regulations prescribing
real estate lending standards. The OTS regulation requires each
savings association to establish and maintain written internal
real estate lending standards consistent with safe and sound
banking practices and appropriate to the size of the institution
and the nature and scope of its real estate lending activities.
The policy must also be consistent with accompanying OTS
guidelines, which include maximum loan-to-value ratios for the
following types of real estate loans: raw land (65 percent), land
development (75 percent), nonresidential construction (80
percent), improved property (85 percent) and one- to four-family
residential construction (85 percent). Owner-occupied one- to
four-family mortgage loans and home equity loans do not have
maximum loan-to-value ratio limits, but those with a loan-to-
value ratio at origination of 90 percent or greater are to be
backed by private mortgage insurance or readily marketable
collateral. Institutions are also permitted to make a limited
amount of loans that do not conform to the proposed loan-to-value
limitations so long as such exceptions are appropriately reviewed
and justified. The guidelines also list a number of lending
situations in which exceptions to the loan-to-value standard are
justified.
STANDARDS FOR SAFETY AND SOUNDNESS. As required by FDICIA
and subsequently amended by the Riegle Community Development and
Regulatory Improvement Act of 1994, the federal banking
regulators adopted interagency guidelines establishing standards
for safety and soundness for depository institutions on matters
such as internal controls, loan documentation, credit
underwriting, interest-rate risk exposure, asset growth,
compensation and other benefits and asset quality and earnings
(the "Guidelines"). The agencies expect to request a compliance
plan from an institution whose failure to meet one or more of the
standards is of such severity that it could threaten the safe and
58
sound operation of the institution. FDIC regulations enacted
under FDICIA also require all depository institutions to be
examined annually by the banking regulators (but see, "Regulatory
Relief for Thrifts and Banks") and depository institutions having
$500 million or more in total assets to have an annual
independent audit, an audit committee comprised solely of outside
directors, and to hire outside auditors to evaluate the
institution's internal control structure and procedures and
compliance with laws and regulations relating to safety and
soundness. The FDIC, in adopting the regulations, reiterated its
belief that every depository institution, regardless of size,
should have an annual independent audit and an independent audit
committee.
FINANCIAL MANAGEMENT REQUIREMENTS. FDICIA imposes new
financial reporting requirements on all depository institutions
with assets of more than $500 million, their management, and
their independent auditors. It also establishes new rules for
the composition, duties and authority of such institutions' audit
committees and boards of directors. Among other things, all such
depository institutions will be required to prepare and make
available to the public annual reports on their financial
condition and management (including statements of managements'
responsibility for the financial statements, internal controls
and compliance with certain federal banking laws and regulations
relating to safety and soundness, and an assessment by management
of the effectiveness of the institution's internal controls and
procedures and the institution's compliance with such laws and
regulations). The institution's independent public accountants
are required to attest to these management assessments. Each such
institution is also required to have an audit committee composed
of independent directors.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings
institutions to maintain non-interest-earning reserves against
their transaction accounts (primarily NOW and regular checking
accounts), non-personal time deposits (those which are
transferable or held by a person other than a natural person)
with an original maturity of less than one and one-half years and
certain money market accounts. The Federal Reserve Board
regulations generally require that reserves of 3% must be
maintained against aggregate transaction accounts of $52 million
or less (subject to adjustment by the Federal Reserve Board) and
an initial reserve of $1.6 million plus 10 percent (subject to
adjustment by the Federal Reserve Board between 8 percent and 14
percent) against that portion of total transaction accounts in
excess of $52 million. The first $4.3 million of otherwise
reservable balances (subject to adjustments by the Federal
Reserve Board) are exempted from the reserve requirements. The
Savings Bank is in compliance with the foregoing requirements.
59
The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements by the OTS. Because required reserves
must be maintained in the form of either vault cash, a non-
interest-bearing account at a Federal Reserve Bank or a pass-
through account as defined by the Federal Reserve Board, the
effect of this reserve requirement is to reduce the Savings
Bank's interest-earning assets.
FHLB System members are also authorized to borrow from the
Federal Reserve "discount window," but Federal Reserve Board
regulations require institutions to exhaust all FHLB sources
before borrowing from a Federal Reserve Bank.
HOLDING COMPANY REGULATION
The Corporation is considered a non-diversified, savings and
loan holding company within the meaning of the HOLA, has
registered as a savings and loan holding company with the OTS and
is subject to OTS regulations, examinations, supervision and
reporting requirements. In addition, the OTS has enforcement
authority over the Corporation and its non-savings association
subsidiaries. Among other things, this authority permits the OTS
to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings association.
The HOLA prohibits a savings and loan holding company,
directly or indirectly, or through one or more subsidiaries, from
(i) acquiring control of, or acquiring by merger or purchase of
assets, another savings association or holding company thereof,
without prior written approval of the OTS; (ii) acquiring or
retaining, with certain exceptions, more than 5 percent of a non-
subsidiary savings association, a non-subsidiary holding company,
or a non-subsidiary company engaged in activities other than
those permitted by the HOLA; or (iii) acquiring or retaining
control of an institution that is not federally insured. In
evaluating applications by holding companies to acquire savings
associations, the OTS must consider the financial and managerial
resources and future prospects of the company and institution
involved, the effect of the acquisition on the risk to the
insurance funds, the convenience and needs of the community and
competitive factors.
As a unitary savings and loan holding company, the
Corporation generally is not restricted under existing laws as to
the types of business activities in which it may engage, provided
that its savings association subsidiary continues to satisfy the
QTL test. Upon any acquisition by the Corporation of another
SAIF-insured institution (other than the Corporation), a federal
savings bank insured by the BIF, or a state-chartered BIF-insured
savings bank meeting the QTL test that is deemed to be a savings
institution by OTS, except for a supervisory acquisition, the
Corporation would become a multiple savings and loan holding
company (if the acquired institution is held as a separate
60
subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could engage. The HOLA,
as amended by the FIRREA, limits the activities of a multiple
savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the BHC Act, subject to the
prior approval of the OTS, and activities in which multiple
savings and loan holding companies were authorized by regulation
to engage in on March 5, 1987. Such activities include mortgage
banking, consumer finance, operation of a trust company, and
certain types of securities brokerage. The services and
activities in which multiple holding companies were authorized to
engage in on March 5, 1987 generally correspond to the activities
which are permitted for service corporations of federally-
chartered savings institutions.
ITEM 2. PROPERTIES
----------
The following table sets forth the location of the Savings
Banks offices and other facilities as well as certain additional
information relating to these offices and facilities as of
December 31, 1996.
TOTAL NET BOOK
LOCATION INVESTMENT VALUE OWNED/LEASE
-------- ----------- ------ -----------
(In Thousands)
Home Office:
420 South Koeller Street
Oshkosh, Wisconsin 54902 $2,896 $2,214 Owned
Oshkosh Office:
16 Washington Avenue
Oshkosh, Wisconsin 525 150 Owned
Appleton Office:
1220 West Northland
Avenue 657 382 Owned
Appleton, Wisconsin
Winneconne Office:
927 East Main Street
Winneconne, Wisconsin 136 75 Owned
Berlin Office:
137 East Huron Street
Berlin, Wisconsin 188 127 Owned
61
TOTAL NET BOOK
LOCATION INVESTMENT VALUE OWNED/LEASE
-------- ----------- ------ -----------
Ripon Office:
547 East Fond du Lac
Avenue 5 3 Leased
Ripon, Wisconsin 43971
Wautoma Office:
Highway 21 and 73E
Wautoma, Wisconsin 54982 18 16 Leased
The net book value of the Corporation's investment in
office, properties and equipment totaled $3.5 million at
December 31, 1996.
ITEM 3. LEGAL PROCEEDINGS
-----------------
Although the Corporation is, from time to time, involved in
various legal proceedings in the normal course of business, there
are no material pending legal proceedings to which the
Corporation, or any of its subsidiaries is a party, or to which
any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders
during the fourth quarter of the fiscal year ended December 31,
1996.
62
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
-------------------------------------------------
The common stock of the Corporation is traded in the over-
the-counter market on The Nasdaq Stock Market under the symbol
"OSBF." The Corporation became a public company in June 1992 in
connection with the Savings Bank's conversion from the mutual to
stock form of ownership. As of February 28, 1997, there were
approximately 1,300 shareholders of record.
The following table includes quarterly information on the
price range, book value, earnings per share and cash dividends
paid on the Corporation's common stock. These prices represent
quotations between dealers and do not necessarily represent
actual transactions and do not include retail markups, markdowns
or commissions.
STOCK DATA PER SHARE
For the Three Month Period Ending
3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96 12/31/96
------- ------- ------- -------- ------- ------- ------- --------
Sales Price
High $24.25 $24.50 $24.88 $24.88 $24.25 $24.25 $24.00 $28.00
Low 21.75 23.00 23.88 23.75 22.75 22.50 22.75 23.00
Book Value* 27.54 28.05 28.57 28.20 28.01 28.26 27.93 28.57
Earnings Per
Share .23 .31 .25 (.56) .39 .41 (.13) .50
Cash Dividend
Per Share .14 .14 .14 .14 .14 .16 .16 .16
- --------------------------
* At end of period.
63
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following table sets forth certain information
concerning the Corporation's financial position and results of
operations (including consolidated data from operations of
subsidiaries) at the dates included.
AT DECEMBER 31,
---------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
FINANCIAL CONDITION DATA:
Total Assets $255,105 $260,814 $236,511 $190,105 $192,385
Loans Receivable and Held for Sale, net 171,792 168,462 144,635 126,121 151,434
Mortgage-related Securities 44,336 49,838 45,689 20,505 7.710
Cash, Interest Bearing Deposits and
Investment Securities 29,961 33,552 37,158 36,475 26,067
Deposits 162,122 156,782 158,335 140,784 146,737
Borrowings 55,160 64,335 38,950 7,550 4,250
Stockholders' Equity 31,756 32,633 32,261 35,048 36,013
64
For the Year Ended December 31,
--------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands, except per share amounts)
OPERATING DATA:
Interest Income $ 18,401 $ 17,515 $ 13,775 $ 13,366 $ 14,908
Interest Expense 10,865 10,946 7,213 6,293 7,757
------ -------- -------- -------- --------
Net Interest Income 7,536 6,569 6,562 7,073 7,151
Provision for Loan Losses 515 198 30 90 160
------ ----- ----- ----- -----
Net Interest Income after Provision for Loan
Losses 7,021 6,371 6,532 6,983 6,991
Non-Interest Income 789 681 718 717 639
Non-Interest Expense 6,109 5,477 4,658 4,041 3,823
Gains (Losses) from Sale of Loans,
Securities, and Other Assets 249 (622) 128 888 96
------ -------- -------- -------- --------
Income Before Income Taxes 1,950 953 2,720 4,547 3,903
Provision for Income Taxes 635 686 1,018 1,84 1,607
------ -------- -------- -------- --------
Net Income before Cumulative Effect of
Change in Accounting Principle 1,315 267 1,702 2,699 2,296
Cumulative Effect of Change in Accounting 0 0 0 105 0
Principle ------ -------- ------- ------- -------
Net Income $1,315 $ 267 $ 1,702 $ 2,804 $ 2,296
====== ======== ======= ======= =======
PER SHARE DATA:
Earnings Per Share $ 1.17 $ 0.23 $ 1.36 $ 1.94 $ 0.76
Dividends Per Share (In 1992,
for period from
July 1- December 31) 0.62 0.56 0.52 0.42 0.18
65
At or For the Year Ended December 31,
-------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
KEY OPERATING RATIOS:
Return on Assets (Net Income divided by
Average Assets) 0.52% 0.11% 0.80% 1.47% 1.27%
Return on Average Equity (Net Income divided
by Average Equity) 4.14% 0.82% 5.01% 7.71% 8.34%
Average Equity to Average Assets 12.50% 13.05% 16.13% 18.94% 15.23%
Dividends as a Percentage of Net Income
(For period from July 1-December 31, 1992) 52.70% 242.32% 39.72% 21.47% 23.56%
Interest Rate Spread (Difference between
Average Yield on Interest Earning Assets
and Average Cost of Interest Bearing
Liabilities) 2.36% 2.07% 2.64% 3.02% 3.26%
Net Interest Margin (Net Interest as a
Percentage of Average Interest Earning
Assets) 3.05% 2.74% 3.28% 3.84% 4.10%
Non-Interest Expense to Average Assets 2.40% 2.20% 2.24% 2.11% 2.12%
Average Interest Earning Assets to Interest
Bearing Liabilities 115.65% 114.62% 117.75% 123.90% 118.86%
Allowance for Loan Losses to Total Loans
at End of Period 0.72% 0.48% 0.44% 0.51% 0.38%
Net Charge Offs to Average Outstanding
Loans During the Period 0.06% 0.01% 0.04% 0.02% 0.18%
Ratio of Non-Performing Assets to Total
Assets 0.22% 0.11% 0.40% 0.38% 0.87%
66
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------
GENERAL
Management's discussion and analysis of financial condition
and results of operations is intended to assist in understanding
the financial condition and results of operations of OSB and
Oshkosh Savings. The information contained in this section
should be read in conjunction with the Consolidated Financial
Statements, the accompanying Notes to Consolidated Financial
Statements and the other sections contained in this Form 10-K.
RESULTS OF OPERATIONS
The operating results of Oshkosh Savings depend primarily on
its net interest income, which is the difference between interest
income on interest-earning assets, primarily loans and securities
available for sale, interest expense on interest-bearing
liabilities, primarily deposits and borrowings. Oshkosh Savings'
net income also is affected by the establishment of provisions
for loan losses and the level of its other income, including fees
on loans sold, deposit service charges, real estate activities,
gains or losses from the sale of assets, as well as its other
operating expenses and income tax provisions.
67
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995
Net income for the year ended December 31, 1996 totaled $1.3
million, or $1.17 per share. This compares with net income of
$267,000, or $.23 per share for 1995. The table below presents
an analysis of net income and the effects of non-recurring
charges on net income for each year, with a discussion following.
1996 1995 $ Change % Change
-------------------------------------
(Dollars in Thousands)
Total interest and dividend
income $18,401 $17,515 $886 5.06%
Total interest expense 10,865 10,946 (81) -0.74%
--------------------------
Net interest income 7,536 6,569 967 14.72%
Provision for loan losses 515 198 317 160.10%
--------------------------
Net Interest income after
provision for loan losses 7,021 6,371 650 10.20%
Non-interest income 790 681 109 16.01%
Non-interest expense 5,059 5,262 (203) -3.86%
Gains on sale of assets 248 192 56 29.17%
--------------------------
Pre-tax income before non-
recurring charges 3,000 1,982 1,018 51.36%
Income tax expense 1,011 768 243 31.64%
--------------------------
Net income before non-recurring
charges 1,989 1,214 775 63.84%
Non-recurring charges (see text
for detail) - net of tax 674 947
================
Net income $1,315 $267
================
OSB's core earnings (net income before non-recurring
charges) increased $775,000. This was primarily the result of an
increase of approximately $1 million in net interest income,
partially offset by an additional $317,000 provision for loan
losses and $243,000 in income tax expense. The increase in net
interest income is primarily the result of an improvement in the
interest rate spread from 2.06% for the year 1995 to 2.36% in
1996.
The yield on interest-earning assets increased from 7.26%
for 1995 to 7.45% for 1996. This was primarily the result of an
increased emphasis on higher yielding commercial and consumer
loans, rather than mortgage loans. Commercial and consumer loans
increased to 21.2% of the total loan portfolio as of December 31,
1996, from 15% of the total portfolio at December 31, 1995. The
yield on the commercial and consumer loans was 9.37% for 1996,
compared to 7.63% for the same period on the mortgage loan
portfolio. The other key factor in improving the interest rate
68
spread was a decrease in the cost of borrowed funds from 6.11% in
1995 to 5.65% in 1996.
The provision for loan losses increased from $198,000 for
the year 1995 to $515,000 in 1996. This is due primarily to the
increased emphasis on commercial and consumer loan origination.
These loans carry more credit risk than real estate mortgage
loans. The allowance for loan losses of $1.2 million at December
31, 1996 equals 0.72% of loans receivable, compared to $810,000
and 0.48%, respectively, at December 31, 1995. Non-performing
assets at the end of 1996 were $567,000, or 0.22% of total
assets, versus $228,000, or 0.09% of assets, at the end of 1995.
The increase in provision for income taxes is due to the
higher pre-tax earnings.
The non-recurring charge in 1996 was a one-time special
assessment by the FDIC of $1.05 million. Deposits of Oshkosh
Savings are currently insured by the FDIC under the SAIF. The
FDIC also maintains the BIF, which primarily insures commercial
banks. A disparity existed in premium costs between the BIF and
SAIF funds, with nearly 92% of BIF insured banks paying the
statutory annual minimum of $2,000, while SAIF institutions paid
premiums based on a schedule of $.23 to $.31 per $100 of
deposits.
On September 30, 1996, President Clinton signed the Deposit
Insurance Funds Act of 1996 ("DIFA"), which included the thrift
fund rescue and relief package. Key elements of DIFA include:
1) One-time special assessment to capitalize the SAIF of
65.7 basis points, based on March 31, 1995 deposits.
The one-time assessment was charged in the third
quarter 1996 and paid in November. The after-tax
effect is $674,000, or $.60 per share.
2) From 1997 through 1999, SAIF members will pay annual
premiums estimated to be 6.7 basis points, while BIF
members pay an estimated 1.3 basis points.
3) SAIF and BIF will be merged on January 1, 1999,
provided no savings associations exist on that day.
4) DIFA also provides a number of important changes to
reduce the regulatory burden on all financial
institutions.
The non-recurring charge in 1995 was fourth quarter after-
tax charge of $947,000. This charge included the write-down of
$814,000 for other than temporary loss of value in the mutual
fund portfolio, $120,000 for costs associated with a review and
analysis of the investment portfolio, and $95,000 related to
changes in accounting practices, offset by $82,000 in income tax
benefits. There was no income tax benefit recognized on the
69
$814,000 write-down of mutual funds. The loss incurred on the
sale of mutual funds is a capital loss. Such losses are
deductible only to the extent of capital gains. The losses may
be carried forward for five years to offset future capital gains.
Capital gains are realized by the sale of capital assets, which
include marketable equity securities, property held for
investment, branches, or investment securities held by a
subsidiary of the bank. There can be no assurance that OSB will
generate capital gains in the future to offset this capital loss.
70
FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED TO DECEMBER 31, 1994
Net income declined to $267,000 in 1995, from $1.7 million
in 1994. This resulted in a drop in earnings per share from
$1.36 in 1994 to $.23 in 1995. The table below shows the basic
elements of the decline, with a discussion following:
STATEMENT OF INCOME HIGHLIGHTS
($ IN THOUSANDS) 1995 1994 $ Change % Change
Interest and dividend income
Mortgage loans $10,678 $8,460 $2,218 26.2%
Other loans 1,531 906 625 69.0%
Mortgage-related securities 3,233 2,278 955 41.9%
Other interest and dividend income 2,073 2,131 (58) -2.7%
-------------------------
Total interest and dividend income 17,515 13,775 3,740 27.2%
-------------------------
Interest Expense
Deposit accounts 7,708 5,876 1,832 31.2%
Borrowed funds 3,238 1,337 1,900 142.1%
-------------------------
Total interest expense 10,946 7,213 3,732 51.7%
-------------------------
Net interest income 6,569 6,562 8 0.1%
Provision for loan losses 198 30 168 560.0%
-------------------------
Net interest income after provision for
loan losses 6,371 6,532 (160) -2.4%
-------------------------
Gain (loss) on sale of assets (622) 128 (750) -585.6%
Other noninterest income 681 719 (38) -5.3%
-------------------------
Total noninterest income 59 847 (788) -93.0%
-------------------------
Total operating expenses 5,477 4,659 818 17.6%
-------------------------
Income before taxes 953 2,720 (1,767) -64.9%
Provision for income taxes 686 1,018 (332) -32.6%
-------------------------
Net Income $267 $1,702 ($1,435) -84.3%
=========================
The big reason for the decrease in net income was a fourth
quarter charge of $947,000. This charge included a write down of
$814,000 for other than temporary loss of value in the mutual
fund portfolio, $120,000 for costs associated with a review and
analysis of the investment portfolio, and $95,000 related to
changes in accounting practices, offset by $82,000 in income tax
benefits.
There was no income tax benefit recognized on the $814,000
write down of the mutual funds. A loss incurred on the sale of a
71
mutual fund is a capital loss. Capital losses are deductible
only to the extent of capital gains. The losses may be carried
forward for five years to offset future capital gains. Capital
gains are realized by the sale of capital assets, which include
marketable equity securities, property held for investment,
branches, or investment securities held by a related entity of
Oshkosh Savings. There can be no assurance that OSB will
generate capital gains in the next five years. However,
management will analyze future opportunities that could generate
capital gains.
Net interest income was virtually unchanged between the two
years, as both total interest and dividend income and total
interest expense increased significantly. Mortgage loan interest
income increased by $2.2 million in 1995, primarily due to an
increase in volume. The yield on mortgage loans declined
slightly, from 7.66% in 1994 to 7.58% in 1995. But the yield
increased steadily over the last six months of the year, and the
weighted average yield at December 31, 1995 was 7.71%.
Interest income on mortgage-related securities increased by
$1.0 million, or 41.9%. Throughout 1994, Oshkosh Savings
purchased $31.9 million of these securities. The increase in
1995 represents a full year's earnings on the securities
purchased in 1994.
Interest on other loans increased by $625,000 in 1995. This
is the result of an increase in volume related to Oshkosh
Savings' emphasis on commercial loans and second mortgage and
home equity line of credit loans in 1995. These loans provide
higher yields than other alternatives, typically at prime rate
and above.
Interest expense on borrowed funds increased by $1.9 million
in 1995. This is due primarily to the increase of $25.4 million
in borrowed funds from December 31, 1994 to December 31, 1995.
Also, the costs of borrowed funds increased from 4.90% in 1994 to
6.11% in 1995.
Interest expense on deposit accounts increased by $1.8
million in 1995. Since there was little change in deposit
balances, the change is a result of an increase in costs of
deposits from 4.12% in 1994 to 4.89% in 1995.
The provision for loan losses increased from $30,000 in 1994
to $198,000 in 1995. This is the result of the increase in the
loans receivable portfolio. Also, the entry into the relatively
riskier loan types, namely commercial and consumer loans,
contributed to the increase. General loss reserves as of
December 31, 1995, were $810,000, or 0.48% of total loans
receivable. This compares to the December 31, 1994 balance of
$633,000, or 0.44% of total loans at that time. Non-performing
assets were 0.09% of total assets at December 31, 1995, compared
to 0.41% a year earlier.
72
Ignoring the effect of fourth quarter charges, results of
core operations in 1995 would have been:
Twelve Months Ended
December 31,
-------------------
1995 1994 $ Change % Change
-----------------------------------------
(Dollars in Thousands)
Net Interest Income After -2.46%
Provision for Loan Losses $6,371 $6,532 ($161)
Non-interest Income 681 718 (37) -5.15%
Non-interest Expense 5,262 4,658 604 12.97%
Gains on Sale of Assets 192 128 64 50.00%
-----------------------------
Pre-tax Income 1,982 2,720 (738) -27.13%
Income Tax Expense 768 1,018 (250) -24.56%
-----------------------------
Net Income $1,214 $1,702 ($488) -28.67%
=============================
Noninterest expenses increased by $604,000 in 1995, or
12.97%. Of this amount, $250,000 was for personnel costs for the
first full year of operation for branch offices in Ripon and
Wautoma, and the Business Banking Department. The Ripon branch
opened in March 1994. The Wautoma branch opened in August 1994.
The vice president of business banking was hired in July 1994,
with the rest of his staff added in late 1994. Approximately
$100,000 of the increase was related to the retirement of a
senior officer in July 1995. The balance of the increase was due
to normal increases in costs of doing business.
73
FINANCIAL CONDITION
Assets decreased from $260.8 million at December 31, 1995 to
$255.1 million at December 31, 1996, a decrease of 2.19%. The
table below indicates the areas of change.
As of December 31,
------------------
$ in Millions 1996 1995 $ Change % Change
--------------------------------------
Assets
------
Investment securities available
for sale $70.3 $79.6 ($9.3) -11.68%
Loans held for sale 1.1 3.0 (1.9) -63.33%
Loans receivable 170.7 165.4 5.3 3.20%
Other Assets 13.0 12.8 0.2 1.56%
------------------
TOTAL ASSETS $255.1 $260.8 (5.7) -2.19%
==================
Liabilities and Stockholders' Equity
------------------------------------
Deposit accounts 162.1 156.8 5.3 3.38%
Borrowed funds 55.2 64.3 (9.1) -14.15%
Other liabilities 6.0 7.1 (1.1) -15.49%
Stockholders' equity before treasury 40.2 39.4 0.8 2.03%
stock
Treasury stock (8.4) (6.8) (1.6) 23.53%
------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $255.1 $260.8 ($5.7) -2.19%
==================
The decrease in investment securities available for sale of
$9.3 million is primarily the result of the sale of mutual fund
investments. As mentioned previously, a charge of $814,000 was
taken against these funds in 1995 because of an other than
temporary loss in market value. After the markdown, the funds
were sold, primarily in early 1996 at a slight gain. Oshkosh
Savings has a balance of $890,000 remaining in mutual funds as of
December 31, 1996. With the funds generated from the sale of the
mutual funds, Oshkosh Savings paid off borrowed funds as the
opportunity arose during the course of 1996. The balance in
borrowed funds decreased from $64.3 million at December 31, 1995
to $55.2 million at the end of 1996, a decrease of just over $9
million. The cost of the borrowings also decreased from 6.11% in
1995 to 5.65% in 1996.
As shown above, loans receivable increased by $5.3 million
from December 31, 1995 to December 31, 1996. As mentioned
previously, the effort was made to diversify the loan portfolio
by emphasizing origination of commercial and consumer loans. The
result was a $6.8 million increase in commercial loan balances
74
and a $4.7 million increase in consumer loans. The bulk of the
increase in consumer loans was in home equity lines of credit and
second mortgages.
The mortgage loan portfolio decreased by $6.2 million from
the end of 1995 to December 31, 1996. In order to manage
interest rate risk, Oshkosh Savings sells into the secondary
market various fixed rate mortgage loans typically on terms of 15
years or greater. With relatively low fixed rate mortgage rates
during much of 1996, demand for this type of loan was strong.
Oshkosh Savings originated $17.4 million of long term fixed rate
mortgage loans in 1996, and sold $19.3 million of such loans into
the secondary market. The difference resulted in the $1.9
million decrease in balances in loans held for sale at the
respective year ends.
Deposit account balances increased by $5.3 million, or
3.38%, during the course of 1996. The primary area of growth was
the Money Market Index account, which was introduced in late
1995. Balances in this account grew to $15.3 million as of
December 31, 1996. The cost of funds for deposits remained
constant at 4.89% for both 1995 and 1996.
In 1996, as part of its stock buyback plans, OSB purchased
67,368 shares of its common stock on the open market at a total
cost of $1.6 million, or an average of $23.77 per share. OSB
still has authorization to purchase an additional 47,474 shares.
LIQUIDITY AND CAPITAL RESOURCES
Oshkosh Savings' primary sources of funds are deposits,
Federal Home Loan Bank of Chicago advances, principal and
interest payments on loans, securities available for sale and
securities to be held to maturity, and sale of fixed rate
mortgage loans. The table shows these sources from year to year:
($ in Millions)
1996 1995 1994
------ ------ ------
Net Deposits $ 5.3 ($ 1.6) $ 17.5
FHLB advances (9.2) 25.6 31.4
Loan principal payments 51.4 49.2 37.5
Principal payments and maturities
on securities 8.0 7.9 7.0
Proceeds from loan sales 19.6 9.7 19.6
Interest income received 18.5 17.5 14.0
------ ------ ------
$93.7 $108.1 $127.0
====== ====== ======
The primary investing activity of Oshkosh Savings is the
origination of loans. Loan originations were $74.1 million,
$78.9 million, and $75.7 million for the years ended December 31,
1996, 1995 and 1994, respectively. Other investment activities
75
include the purchase of securities available for sale and
securities to be held to maturity. Purchases were $10.0 million,
$4.3 million, and $39.0 million for the three years,
respectively.
Both the sources of funds and investment opportunities are
dependent upon factors such as the interest rate environment,
general economic condition, and competition. Oshkosh Savings
considers these factors in pricing loan and deposit products, and
in making investment decisions.
The OTS requires a savings institution to maintain an
average daily balance of liquid assets (cash and eligible
investments) equal to at least 5% of the average daily balance of
its net withdrawable deposits and short-term borrowings. In
addition, short-term liquid assets currently must constitute 1%
of the sum of net withdrawable deposit accounts plus short-term
borrowings. Oshkosh Savings consistently maintains liquidity
levels in excess of regulatory requirements.
Oshkosh Savings is required to maintain specific amounts of
capital pursuant to the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 and regulations promulgated pursuant
thereto. As of December 31, 1996 Oshkosh Savings was in
compliance with all regulatory capital requirements which were
effective as of such date, with tangible, core and risk-based
capital ratios of 10.8%, 10.8% and 22.4%, respectively.
Requirements are 1.5%, 3.0% and 8.0%, respectively.
EFFECT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related financial
data presented herein have been prepared in accordance with GAAP
which require the measurement of financial position and operating
results in terms of historical dollars, without considering the
changes in relative purchasing power of money over time due to
inflation. The primary impact of inflation on operations of
Oshkosh Savings is reflected in increased operating costs.
Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature.
As a result, interest rates generally have a more significant
impact on a financial institution's performance than do general
levels of inflation. Interest rates do not necessarily move in
the same direction or to the same extent as the prices of goods
and services.
76
FUTURE ACCOUNTING CHANGES
The FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities"
in June 1996. SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and
extinguishments of liabilities. The standards are based on
consistent application of a financial-components approach that
focuses on control. Under the financial-components approach, an
entity recognizes the financial and servicing assets it controls
and the liabilities it has incurred after a transfer of financial
assets. In addition, the entity does not recognize financial
assets when control has been surrendered and does not recognize
liabilities when extinguished. This statement is required to be
adopted by OSB for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31,
1996. The adoption of SFAS No.125 is not anticipated to have a
significant impact on OSB's financial condition or results of
operations once implemented.
77
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Summaries of consolidated results of operations on a
quarterly basis for the years ended December 31, 1996 and 1995
are as follows:
OPERATING DATA BY QUARTER
FISCAL YEAR 1996 First Second Third Fourth
----- ------ ----- ------
(Dollars in Thousands, except per share amounts)
Interest Income $4,612 $4,499 $4,601 $4,689
Interest Expense 2,812 2,642 2,714 2,697
----- ----- ----- -----
Net Interest Income 1,800 1,857 1,887 1,992
Provision for Loan Losses 140 75 100 200
------ ------- ------ ------
Net Interest Income After
Provision For Loan Losses 1,660 1,782 1,787 1,792
Non-Interest Income 254 208 227 102
Non-Interest Expense 1,322 1,322 2,345 1,121
Gains (Losses) From Sale of
Loans Securities, and Other
Assets 130 10 67 41
------ -------- -------- --------
Net Income Before Income Taxes 722 678 (264) 814
Provision for Income Taxes 274 221 (113) 253
------ ------ ------ ------
Net Income $ 448 $ 457 $ (151) $ 561
====== ====== ====== ======
Earnings per Share $ 0.39 $ 0.41 ($0.13) $ 0.50
====== ====== ======= ======
Cash Dividends per Share $ 0.14 $ 0.16 $ 0.16 $ 0.16
====== ====== ====== ======
78
FISCAL YEAR 1995
Interest Income $4,143 $4,336 $4,472 $4,564
Interest Expense 2,541 2,761 2,789 2,855
------ ------ ------ ------
Net Interest Income 1,602 1,575 1,683 1,709
Provision for Loan Losses 60 63 30 45
------ ------ ------ ------
Net Interest Income After
Provision for Loan Losses 1,542 1,512 1,653 1,664
Non-Interest Income 220 234 156 71
Non-Interest Expense 1,319 1,289 1,394 1,475
Gains (Losses) from Sale of
Loans, Securities, and
Other Assets 1 133 51 (807)
------ ------ ------ ------
Income Before Income Taxes 444 590 466 (547)
Provision for Income Taxes 167 226 174 119
------ ------ ------ ------
Net Income $ 277 $ 364 $ 292 $ (666)
====== ====== ====== =======
Earnings per Share $ 0.23 $ 0.31 $ 0.25 $(0.56)
====== ====== ====== =======
Cash Dividends per Share $ 0.14 $ 0.14 $ 0.14 $ 0.14
====== ====== ====== ======
79
CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITOR'S REPORT
Board of Directors
OSB Financial Corp.
Oshkosh, Wisconsin
We have audited the accompanying consolidated statements of
financial condition of OSB Financial Corp. and Subsidiaries as of
December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
condition of OSB Financial Corp. and Subsidiaries at December 31,
1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting
principles.
/s/ Wipfli Ullrich Bertelson LLP
- ---------------------------------
Wipfli Ullrich Bertelson LLP
January 14, 1997
Green Bay, Wisconsin
80
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
OSB FINANCIAL CORP. AND SUBSIDIARIES
December 31,
-------------------------------------
1996 1995
---------------- ----------------
ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . $ 3,209,608 $3,495,645
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . 776,253 293,752
---------------- ----------------
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . 3,985,861 3,789,397
Securities available for sale . . . . . . . . . . . . . . . . . . 70,311,158 79,600,781
Interest receivable on interest-bearing deposits and
investment securities . . . . . . . . . . . . . . . . . . . . . 515,364 401,556
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . 1,137,004 3,070,257
Investment in Federal Home Loan Bank stock, at cost . . . . . . . 3,166,000 3,065,300
Loans receivable - Net . . . . . . . . . . . . . . . . . . . . . 170,654,628 165,392,127
Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . 161,378 -0-
Foreclosed properties . . . . . . . . . . . . . . . . . . . . . . -0- 34,000
Interest receivable on loans . . . . . . . . . . . . . . . . . . 873,184 910,814
Real estate held for investment - Net . . . . . . . . . . . . . . 353,784 701,880
Office properties and equipment . . . . . . . . . . . . . . . . . 3524,248 3,716,646
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 148,012 -0-
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 274,222 131,029
---------------- ----------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . $255,104,843 $260,813,787
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposit accounts . . . . . . . . . . . . . . . . . . . . . . . $162,122,269 $156,782,149
Borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . 55,160,000 64,335,000
Advance payments by borrowers for taxes and insurance . . . . 2,264,469 3,622,325
Accrued and other liabilities:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . 1,161,583 1,135,807
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,485,031 2,112,941
Income taxes:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . 155,645 127,121
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . -0- 65,000
---------------- ----------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . 223,348,997 228,180,343
---------------- ----------------
Commitments and contingencies
Stockholders' equity:
Common stock - $.01 par value: Authorized - 7,000,000 shares
Issued - 1,530,000 and 1,518,000 shares at December 31, 1996
and 1995, respectively . . . . . . . . . . . . . . . . . . . 15,300 15,180
Additional paid-in capital . . . . . . . . . . . . . . . . . . 17,090,657 16,883,089
Retained earnings - Substantially restricted . . . . . . . . . 24,531,199 23,909,462
Unearned compensation - ESOP . . . . . . . . . . . . . . . . . (520,226) (614,941)
Unearned compensation - MRP . . . . . . . . . . . . . . . . . . (678,217) (689,569)
Unrealized loss on securities available for sale - Net of tax . (248,833) (37,000)
---------------- ----------------
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,189,880 39,466,221
Less - 369,866 and 302,498 shares of treasury common stock, at
cost, at December 31, 1996 and 1995, respectively . . . . . . (8,434,034) (6,832,777)
---------------- ----------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . 31,755,846 32,633,444
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . $255,104,843 $260,813,787
================ ================
See accompanying notes to consolidated financial statements.
81
CONSOLIDATED STATEMENTS OF INCOME
OSB FINANCIAL CORP. AND SUBSIDIARIES
Year Ended December 31,
-----------------------------------------------
1996 1995 1994
------------- ------------- -------------
Interest and dividend income:
Mortgage loans $10,814,383 $10,677,738 $8,460,334
Other loans 2,605,490 1,531,408 906,382
Investment securities 1,365,115 1,849,559 1,933,855
Mortgage-related securities 3,226,343 3,232,720 2,278,011
Interest-bearing deposits 183,286 42,359 96,293
Dividends on stock in Federal Home Loan Bank 206,637 181,465 100,734
------------- ------------- -------------
Total interest and dividend income 18,401,254 17,515,249 13,775,609
------------- ------------- -------------
Interest expense:
Deposit accounts 7,749,365 7,707,873 5,875,866
Borrowed funds 3,115,722 3,237,740 1,337,311
------------- ------------- -------------
Total interest expense 10,865,087 10,945,613 7,213,177
------------- ------------- -------------
Net interest income 7,536,167 6,569,636 6,562,432
Provision for loan losses 515,000 198,400 30,000
------------- ------------- -------------
Net interest income after provision
for loan losses 7,021,167 6,371,236 6,532,432
------------- ------------- -------------
Noninterest income:
Loan fees and charges 293,017 296,383 333,115
Savings fees and charges - Net 312,246 210,356 184,122
Write-down of equity securities due to other
than temporary loss in value -0- (814,080) -0-
Gain (loss) on sale of loans 218,513 183,085 (42,074)
Gain (loss) on sale of investments 11,003 -0- (4,165)
Gain on sale of other assets 19,346 9,421 174,000
Other income 184,410 174,253 201,701
------------- ------------- -------------
Total noninterest income 1,038,535 59,418 846,699
Operating expenses:
Compensation, payroll taxes, and other
employee benefits 2,518,000 2,619,989 2,252,194
Marketing 221,846 191,510 231,315
Occupancy 621,566 648,324 640,067
Data processing 370,366 323,300 278,291
Federal insurance premiums 1,432,050 369,675 334,973
Other 945,797 1,324,168 921,520
------------- ------------- -------------
Total operating expenses 6,109,625 5,476,966 4,658,360
Income before provision for income taxes 1,950,077 953,688 2,720,771
Provision for income taxes 635,200 686,000 1,018,300
------------- ------------- -------------
Net income $1,314,877 $267,688 $1,702,471
============= ============= =============
Earnings per share $1.17 $.23 $1.36
============= ============= =============
Cash dividends per share $.62 $.56 $.52
============= ============= =============
See accompanying notes to consolidated financial statements.
82
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
OSB FINANCIAL CORP. AND SUBSIDIARIES
Additional
Common Paid-In Retained Unearned
Stock Capital Earnings ESOP
----------- ----------- ----------- -----------
Balance at January 1, 1994 $15,020 $16,630,980 $23,262,733 $(805,398)
Exercise of stock options 20 22,980
Net income for 1994 1,702,471
Cash dividends declared (676,007)
Repayment on ESOP borrowing 94,752
Purchase of treasury common stock
- 106,095 shares
Increase in unrealized loss on securities
available for sale - Net of tax ----------- ----------- ----------- -----------
Balance at December 31, 1994 15,040 16,653,960 24,289,197 (710,646)
Exercise of stock options 140 228,660
Net income for 1995 267,688
Cash dividends declared (647,423)
Award of MRP shares 469
Repayment on ESOP borrowing 95,705
Purchase of treasury common stock
- 50,103 shares
Decrease in unrealized loss on securities
available for sale - Net of tax ----------- ----------- ----------- -----------
Balance at December 31, 1995 15,180 16,883,089 23,909,462 (614,941)
Exercise of stock options 120 195,518
Net income for 1996 1,314,877
Cash dividends declared (693,140)
Award of MRP shares 12,050
Repayment on ESOP borrowing 94,715
Purchase of treasury common stock
- 67,368 shares
Increase in unrealized loss on securities
available for sale - Net of tax ----------- ----------- ----------- -----------
Balance at December 31, 1996 $15,300 $17,090,657 $24,531,199 $(520,226)
=========== =========== =========== ===========
83
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
OSB FINANCIAL CORP. AND SUBSIDIARIES - (continued)
Unrealized
Loss on
Securities
Available
Compensation for Sale - Treasury
MRP Net of Tax Common Stock Total
----------- ----------- ----------- -----------
Balance at January 1, 1994 $(690,000) $(90,000) $(3,275,434) $35,047,901
Exercise of stock options 23,000
Net income for 1994 1,702,471
Cash dividends declared (676,007)
Repayment on ESOP borrowing 94,752
Purchase of treasury common stock
- 106,095 shares (2,381,026) (2,381,026)
Increase in unrealized loss on securities (1,550,000) (1,550,000)
available for sale - Net of tax ----------- ----------- ----------- -----------
Balance at December 31, 1994 (690,000) (1,650,000) (5,656,460) 32,261,091
Exercise of stock options 228,800
Net income for 1995 267,688
Cash dividends declared 431 (647,423)
Award of MRP shares 900
Repayment on ESOP borrowing 95,705
Purchase of treasury common stock
- 50,103 shares (1,176,317) (1,176,317)
Decrease in unrealized loss on securities 1,603,000 1,603,000
available for sale - Net of tax ----------- ----------- ----------- -----------
Balance at December 31, 1995 (689,569) (67,000) (6,832,277) 32,633,444
Exercise of stock options 195,638
Net income for 1996 1,314,877
Cash dividends declared (693,140)
Award of MRP shares 11,352 23,402
Repayment on ESOP borrowing 94,715
Purchase of treasury common stock
- 67,368 shares (1,601,257) (1,601,257)
Increase in unrealized loss on securities (211,833) (211,833)
available for sale - Net of tax ----------- ----------- ----------- -----------
Balance at December 31, 1996 $(678,217) $(248,833) $(8,434,034) $31,755,846
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
84
CONSOLIDATED STATEMENTS OF CASH FLOWS
OSB FINANCIAL CORP. AND SUBSIDIARIES
1996 1995 1994
-------------- -------------- --------------
Cash flows from operating activities:
Net income $1,314,877 $267,688 $1,702,471
-------------- -------------- --------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 329,708 303,250 312,302
Provision for estimated losses on assets 515,000 285,400 30,000
Net gain on sale of assets (248,862) (192,506) (64,771)
Write-down of equity securities due to other
than temporary loss in value -0- 814,080 -0-
Provision (credit) for deferred income taxes (91,804) 69,142 (144,000)
Loans originated for sale (17,396,525) (8,722,254) (8,105,632)
Proceeds from loan sales 19,551,481 9,747,853 19,645,597
Changes in operating assets and liabilities 147,880 165,294 (57,856)
-------------- -------------- --------------
Total adjustments 2,806,878 2,470,259 11,615,640
-------------- -------------- --------------
Net cash provided by operating activities 4,121,755 2,737,947 13,318,111
-------------- -------------- --------------
Cash flows from investing activities:
Proceeds from sale of securities available for sale 10,858,957 -0- 1,602,335
Proceeds from maturities of investment securities 5,500,000 6,061,225 2,000,000
Purchase of investment securities (9,956,828) -0- (6,516,392)
Principal repayments on mortgage-related securities 2,556,965 1,882,321 4,989,827
Purchase of mortgage-related securities -0- (4,284,418) (31,884,294)
Net increase in loans (5,777,501) (24,906,740) (30,567,148)
Purchase of FHLB stock (356,500) (1,080,300) (594,200)
Proceeds from redemption of FHLB stock 255,800 -0- -0-
Proceeds from sale of foreclosed properties
and investment properties 401,061 246,386 1,200,293
Capital expenditures (131,628) (531,587) (1,107,829)
-------------- -------------- --------------
Net cash provided by (used in) investing activities 3,350,326 (22,613,113) (60,877,408)
-------------- -------------- --------------
Cash flows from financing activities:
Net increase (decrease) in deposit accounts 5,340,120 (1,553,059) 17,551,601
Net increase (decrease) in borrowed funds (9,175,000) 25,385,000 31,400,000
Net increase (decrease) in advance payments by
borrowers for taxes and insurance (1,357,856) (22,630) 293,950
Exercise of stock options 195,638 228,800 23,000
Purchase of treasury common stock (1,601,257) (1,176,317) (2,381,026)
Dividends paid (677,262) (647,423) (663,466)
-------------- -------------- --------------
Net cash provided by (used in) financing activities (7,275,617) 22,214,371 46,224,059
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 196,464 2,339,205 (1,335,238)
Cash and cash equivalents at beginning 3,789,397 1,450,192 2,785,430
-------------- -------------- --------------
Cash and cash equivalents at end $ 3,985,861 $ 3,789,397 $ 1,450,192
============== ============== ==============
Supplemental information:
- ------------------------
Cash paid during the year for:
Interest on deposit accounts $7,674,539 $7,599,100 $ 5,708,435
Interest on borrowed funds 3,164,772 3,112,541 1,190,187
Income taxes 640,825 728,331 1,062,250
Loans transferred to foreclosed
properties -0- 81,000 351,473
Loans originated from sale of foreclosed properties -0- 64,000 212,362
Loans transferred to held for sale from held for investment -0- 3,701,058 -0-
Loans transferred to held for investment from held for sale 567,678 -0- -0-
See accompanying notes to consolidated financial statements.
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CSB FINANCIAL CORP.
AND SUBSIDIARIES
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
The accounting policies of OSB Financial Corp. and Subsidiaries
(the "Corporation") conform to generally accepted accounting
principles and prevailing practices within the thrift industry.
A summary of the more significant accounting policies follows.
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the
accounts of OSB Financial Corp.; Oshkosh Savings Bank, FSB, (the
"Bank"); and its wholly owned subsidiaries, Oshkosh Financial,
Inc. and OSB Investments, Inc., after elimination of significant
intercompany accounts and transactions.
Nature of Operations
- --------------------
OSB Financial Corp. is the holding company for Oshkosh Savings
Bank, FSB. The holding company owns all of the outstanding stock
of the Bank. The Bank is a federally chartered stock savings
bank which conducts its business through seven full service
facilities. The Bank operates as a full service financial
institution with a primary market area including, but not limited
to, Winnebago, Outagamie, Calumet, Marquette, Fond du Lac, Green
Lake, and Waushara counties. The Bank emphasizes permanent and
construction loans secured by residential real estate. The Bank
also originates multi-family, construction, and commercial loans.
Oshkosh Financial, Inc. sells mutual funds and other non-
traditional products through an operating agreement. OSB
Investments, Inc., a Nevada corporation, owns and manages a
portfolio of investment securities, all of which are permissible
investments of the Bank itself.
Use of Estimates in Preparation of Financial Statements
- -------------------------------------------------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
86
Cash Equivalents
- ----------------
The Corporation considers all highly liquid debt instruments with
an original maturity of three months or less to be cash
equivalents.
Investments in Securities
- -------------------------
The Corporation's investments in securities are classified as
available for sale and are accounted for as follows:
Securities available for sale consist of equity securities and
debt and mortgage-related securities. Unrealized holding gains
and losses, net of tax, on securities available for sale are
reported as a net amount in a separate component of stockholders'
equity until realized, if judged to be temporary.
Gains and losses on the sale of securities available for sale are
determined using the specific-identification method. Investment
securities are analyzed by management to determine whether a
decline in fair value below the amortized cost basis is
temporary. If a decline in fair value is judged to be other than
temporary, the cost basis of the individual security is written
down to fair value and the amount of the write-down is included
in the income statement.
Loans Held for Sale
- -------------------
Loans held for sale consist of the current origination of certain
fixed-rate, first-mortgage loans and are recorded at the lower of
aggregate cost or market value. Fees received from the borrower
are deferred and recorded as an adjustment of the sale price. A
gain or loss is recognized at the time of the sale reflecting the
present value of the difference between the contractual interest
rate of the loans sold and the yield to the investor, adjusted
for an estimated normal servicing fee. The servicing fee is
recognized when the related loan payments are received.
Loans Receivable
- ----------------
Loans receivable are stated at unpaid principal balances, less
the allowance for loan losses, and net deferred loan-origination
fees and discounts.
Interest income is recognized using the interest method. Accrual
of interest is discontinued either when reasonable doubt exists
as to the full, timely collection of interest or principal or
when a loan becomes contractually past due by 90 days or more
with respect to interest or principal. At that time, any accrued
87
but uncollected interest is reversed, and additional income is
recorded only to the extent that payments are received and the
collection of principal is reasonably assured.
Loan Fees and Related Costs
- ---------------------------
Loan-origination fees, commitment fees, and direct loan-
origination costs are being deferred and the net amounts
amortized as an adjustment of the related loan's yield. The Bank
is amortizing these amounts into interest income, using the
level-yield method, over the contractual life of the related
loan.
Other loan fees not required to be recognized as a yield
adjustment are included in loan fees and service charges.
Mortgage Servicing Rights
- -------------------------
The cost of mortgage servicing rights is amortized in proportion
to, and over the period of, estimated net servicing revenues.
Impairment of mortgage servicing rights is assessed based on the
fair value of those rights. Fair values are estimated using
discounted cash flows based on a current market interest rate.
For purposes of measuring impairment, the rights are stratified
by rate in the quarter in which they were sold.
Real Estate Held for Investment and Foreclosed Properties
- ---------------------------------------------------------
Real estate properties acquired through, or in lieu of, loan
foreclosure are initially recorded at fair value at the date of
foreclosure. Real estate properties held for investment are
carried at the lower of cost or net realizable value. Costs
relating to development and improvement of property are
capitalized, whereas costs relating to the holding of property
are expensed.
Provision for Estimated Losses on Loans and Foreclosed Properties
- -----------------------------------------------------------------
Effective January 1, 1995, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by
Creditors for Impairment of a Loan," as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan Income
Recognition and Disclosures" (SFAS No. 114).
In accordance with the new standard, the allowance for loan
losses would include specific allowances related to loans which
have been judged to be impaired and which fall within the scope
of SFAS No. 114 (primarily commercial loans). A loan is impaired
when, based on current information, it is probable the
88
Corporation will not collect all amounts due in accordance with
the contractual terms of the loan agreement. These specific
allowances are based on discounted cash flows of expected future
payments using the loan's initial effective interest rate or the
fair value of the collateral if the loan is collateral dependent.
Since the Corporation evaluates the overall adequacy of the
allowance for loan losses on an ongoing basis, the adoption of
SFAS No. 114 did not effect the amount of the allowance for loan
losses or the existing income recognition and charge-off policies
for nonperforming loans.
The Corporation continues to maintain a general allowance for
loans and foreclosed properties not within the scope of SFAS
No. 114. The allowance for loans and foreclosed properties
losses is maintained at a level which management believes is
adequate to provide for possible losses. Management periodically
evaluates the adequacy of the allowance using the Corporation's
past loss experience, known and inherent risks in the portfolio,
composition of the portfolio, current economic conditions, and
other relevant factors. This evaluation is inherently subjective
since it requires material estimates that may be susceptible to
significant change.
Income Taxes
- ------------
Deferred income taxes have been provided under the liability
method. Deferred tax assets and liabilities are determined based
upon the difference between the consolidated financial statement
and tax bases of assets and liabilities, as measured by the
enacted tax rates which will be in effect when these differences
are expected to reverse. Deferred tax expense is the result of
changes in the deferred tax asset and liability.
Office Properties and Equipment
- -------------------------------
Office properties and equipment are recorded at cost.
Maintenance and repair costs are charged to expense as incurred.
When property is retired or otherwise disposed of, the related
cost and accumulated depreciation are removed from the respective
accounts and the resulting gain or loss is recorded in income.
The cost of office properties and equipment is being depreciated
principally by the straight-line method over the estimated useful
lives of the assets for financial reporting purposes.
Advertising Costs
- -----------------
Advertising costs are expensed as incurred.
89
Earnings per Share
- ------------------
Earnings per share of common stock for the years ended
December 31, 1996, 1995, and 1994, were computed based on
consolidated net income and weighted average outstanding shares.
The resulting weighted average number of shares for the years
ended December 31, 1996, 1995, and 1994, are 1,123,060;
1,172,490; and 1,255,075, respectively.
For purpose of earnings per share calculations, MRP shares are
considered issued and outstanding when awarded. ESOP shares are
considered issued and outstanding.
Common stock equivalents are computed using the treasury stock
method. Since there is less than 3% dilution, primary and fully
diluted earnings per share are the same.
Future Accounting Changes
- -------------------------
The Financial Accounting Standards Board (FASB) issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," in June 1996. SFAS No. 125
provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities.
The statement provides guidelines for classification of a
transfer as a sale. The statement also requires liabilities
incurred or obtained by transferors as part of a transfer of
financial assets be initially recorded at fair value. Subsequent
to acquisition, the servicing assets and liabilities are to be
amortized over the estimated net servicing period. This
statement is required to be adopted for transfers and servicing
of financial assets and extinguishments of liabilities occurring
after December 31, 1996.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125."
This statement defers implementation of certain provisions of
SFAS No. 125 for one year. Adoption of SFAS No. 127 is not
anticipated to have a significant impact on the Corporation's
financial condition or results of operations once implemented.
90
NOTE 2 - CHANGE IN ACCOUNTING METHOD
- ------------------------------------
The FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights," in May 1995. As required under the statement, the
Corporation adopted the provisions of the new standard effective
January 1 1996. SFAS No. 122 requires accounting recognition of
the rights to service mortgage loans for others. In accordance
with SFAS No. 122, prior-period consolidated financial statements
have not been restated to reflect the change in accounting
principle.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." As required under the statement, the
Corporation adopted the provisions of the new standard effective
January 1, 1996. SFAS No. 123 establishes financial accounting
and reporting standards for stock-based employee compensation
plans. The statement requires disclosure in the notes to the
financial statements of the difference between the "fair value
method" and the "intrinsic value method" as prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees." The
Corporation has elected to continue to account for stock-based
compensation in accordance with APB Opinion No. 25 on the
financial statements.
91
NOTE 3 - INVESTMENTS IN SECURITIES
- ----------------------------------
The amortized cost and estimated fair value of the Corporation's
investment securities available for sale at December 31 are as
follows:
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
1996
U.S. government and agency securities $20,483,139 $102,637 $70,341 $20,515,435
Obligations of state and
political subdivisions 4,554,669 23,253 12,977 4,564,945
Mortgage-related securities 44,772,299 361,970 797,940 44,336,329
Mutual funds - Marketable
equity securities 889,776 -0- 1,785 887,991
Other 6,458 -0- -0- 6,458
------------ ------------ ------------ ------------
Total $70,706,341 $487,860 $883,043 $70,311,158
============ ============ ============ ============
1995
U.S. government and agency securities $16,080,046 $119,782 $32,740 $16,167,088
Obligations of state and
political subdivisions 4,549,362 25,084 15,561 4,558,885
Mortgage-related securities 49,996,739 598,502 757,209 49,838,032
Mutual funds - Marketable
equity securities 9,030,318 -0- -0- 9,030,318
Other 6,458 -0- -0- 6,458
------------ ------------ ------------ ------------
Total $79,662,923 $743,368 $805,510 $79,600,781
============ ============ ============ ============
The amortized cost and estimated fair value of debt securities
available for sale at December 31, 1996, by contractual maturity,
are shown below. Expected maturities for mortgage-related
securities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
Amortized Estimated
Cost Fair Value
----------- -----------
Due in one year or less $3,521,182 $3,529,150
Due after one year through 17,353,711 17,377,561
five years
Due after five years through 4,162,915 4,173,669
ten years
Mortgage-related securities 44,772,299 44,336,329
----------- -----------
Total $69,810,107 $69,416,709
=========== ===========
92
Proceeds from sale of securities available for sale for the year
ended December 31, 1996 were $10,858,957. Gross gains of $21,391
and gross losses of $10,388 were realized on sales in 1996. The
Corporation recognized a loss in 1995 of $814,080 due to other
than temporary price declines on mutual funds. There were no
sales of securities available for sale in 1995. Proceeds from
sales of securities available for sale during the year ended
December 31, 1994, were $1,602,335. Gross gains of $28,125 and
gross losses of $32,290 were realized on sales in 1994.
Fair values of many securities are estimates based on financial
methods or prices paid for similar securities. It is possible
interest rates could change considerably resulting in a material
change in the estimated fair value.
In December 1995, securities with a book value of approximately
$42,913,000 and an estimated fair value of $42,617,000 were
transferred from the held to maturity classification to the
available for sale classification. The transfer was made in
accordance with the Financial Accounting Standards Board Guide to
Implementation of SFAS No. 115.
93
NOTE 4 - LOANS RECEIVABLE
- -------------------------
Details of loans receivable at December 31 follow:
1996 1995
---------------- ----------------
First-mortgage loans:
One to four-family residential $123,073,617 $129,061,810
Multifamily residential 6,433,259 6,797,396
Construction 7,710,313 7,892,925
Land 1,029,975 1,703,296
---------------- ----------------
Total first-mortgage loans 138,247,164 145,455,427
---------------- ----------------
Consumer loans:
Consumer - Residential 14,176,164 10,584,771
Education loans 1,710,534 830,668
Auto 1,122,267 1,387,731
Other secured 901,861 549,562
Unsecured 685,461 559,142
---------------- ----------------
Total consumer 18,596,287 13,911,874
---------------- ----------------
Commercial loans:
Real estate 15,055,806 9,146,747
Other 3,622,130 2,712,650
---------------- ----------------
Total commercial loans 18,677,936 11,859,397
---------------- ----------------
Subtotals 175,521,387 171,226,698
---------------- ----------------
Less:
Undisbursed loan proceeds 3,651,320 4,868,373
Allowance for loan losses 1,226,738 810,176
Net deferred loan-origination fees (costs) (11,299) 156,022
--------------- ----------------
Subtotals 4,866,759 5,834,571
---------------- ----------------
Totals $170,654,628 $165,392,127
================ ================
94
A summary of the activity in the allowance for loan losses is as
follows:
Year Ended December 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
Balance at beginning $810,176 $632,651 $645,000
Provisions 515,000 198,400 30,000
Charge offs, net of recoveries (98,438) (20,875) (42,349)
---------- ---------- ----------
Balance at end $1,226,738 $810,176 $632,651
========== ========== ==========
The Bank had $60,000 of impaired loans at December 31, 1996, all
of which were on a nonaccrual basis. The average recorded
investment in impaired loans during 1996 was approximately
$109,993, for which no interest income was recognized in 1996.
The Bank had no impaired loans at December 31, 1995.
The majority of the Bank's lending activity is with borrowers
located within its primary market area. Although the Bank has a
diversified portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent upon the general
economic conditions of the area.
95
NOTE 5 - LOAN SERVICING
- -----------------------
Mortgage loans serviced for others are not included in the
accompanying consolidated statements of financial condition. The
unpaid principal balances of mortgage loans serviced for others
was $101,824,785 and $95,381,412 at December 31, 1996 and 1995,
respectively.
Custodial escrow balances maintained in connection with the
foregoing loan servicing, and included in "Accrued and Other
Liabilities-Other", were $801,600 and $656,826 at December 31,
1996 and 1995, respectively.
No impairment of mortgage servicing rights existed at December
31, 1996, therefore no valuation allowance was recorded.
Following is an analysis of changes in mortgage servicing rights
in 1996.
Balance January 1, 1996 $ -0-
Capitalized amounts 193,298
Less - Amortization (31,920)
---------
Balance December 31, 1996 $161,378
=========
Mortgage servicing rights are required to be recognized as a
separate asset and amortized over the estimated servicing income
beginning on January 1, 1996. Mortgage servicing rights were
stratified by rate in the quarter in which they were sold and
amortized using the level yield method.
96
NOTE 6 - FORECLOSED PROPERTIES
- ------------------------------
Foreclosed properties at December 31 are summarized as follows:
1996 1995
--------- --------
Acquired by foreclosure or by deed
in lieu of foreclosure $ -0- $ 81,000
Less - Allowance for estimated losses -0- 47,000
--------- --------
Totals $ -0- $ 34,000
========= ========
A summary of the activity in the allowance for losses on
foreclosed properties is as follows:
Year Ended December 31,
-----------------------------------
1996 1995 1994
-------- --------- --------
Balance at beginning $47,000 $ -0- $ 5,175
Provisions -0- 47,000 -0-
Charge offs (47,000) -0- (5,175)
-------- --------- --------
Balance at end $ -0- $47,000 $ -0-
======== ========= ========
NOTE 7 - OFFICE PROPERTIES AND EQUIPMENT
- ----------------------------------------
Office properties and equipment at December 31 consist of the
following:
1996 1995
----------- -----------
Land and land improvements $ 434,029 $ 427,194
Buildings and building improvements 3,991,005 3,992,867
Furniture, fixtures, and equipment 2,102,924 1,980,973
Automobiles 24,841 32,869
----------- -----------
Subtotals 6,552,799 6,433,903
Less - Accumulated depreciation (3,028,551) 2,717,257
----------- -----------
Totals $3,524,248 $3,716,646
=========== ===========
Depreciation charged to operations totaled $321,218 in 1996,
$317,437 in 1995, and $295,116 in 1994.
97
NOTE 8 - DEPOSIT ACCOUNTS
- -------------------------
Deposit accounts at December 31 are summarized as follows:
1996 1995
----------- -----------
Business Checking (0.00%) $ 1,462,304 $ 729,853
NOW Accounts (1.75% to 2.00% in
1996 and 1.75% to 2.25% in 1995) 14,163,812 14,302,734
Passbook accounts
(2.50% in 1996 and 1995) 18,018,949 20,674,370
Money Manager accounts
(2.75% to 5.00% in 1996 and
3.00% to 5.00% in 1995) 3,829,577 4,136,392
Money Market Index accounts
(4.73% to 5.47% in 1996 and
5.29% to 5.51% in 1995) 15,288,501 9,756,039
Certificate accounts
(4.72% to 6.69% in 1996 and
4.80% to 7.78% in 1995) 109,359,126 107,182,761
----------- -----------
Totals $162,122,269 $156,782,149
=========== ===========
Weighted average interest rate 4.57% 4.68%
=========== ===========
The aggregate amount of short-term jumbo certificates of deposit
with a minimum denomination of $100,000 was $3,832,058 and
$4,980,718 at December 31, 1996 and 1995, respectively.
On December 31, 1996 certificate accounts have scheduled maturity
dates as follows:
Year Ending December 31,
-----------------------------------------------------------------------------------------
1997 1998 1999 2000 2001 Total
----------- ----------- ----------- ---------- ---------- ------------
2.00-2.99% $ 7,402 $ -0- $ -0- $ -0- $ -0- $ 7,402
3.00-3.99% 1,037,446 -0- -0- -0- -0- 1,037,446
4.00-4.99% 3,292,248 367,705 -0- -0- -0- 3,659,953
5.00-5.99% 64,102,848 20,560,840 8,937,337 3,939,703 892,161 98,432,889
6.00-6.99% 3,546,795 1,024,614 1,559,944 80,083 -0- 6,211,436
7.00-7.99% 10,000 -0- -0- -0- -0- 10,000
----------- ----------- ----------- ---------- ---------- ------------
$71,996,739 $21,953,159 $10,497,281 $4,019,786 $ 892,161 $109,359,126
=========== =========== =========== ========== ========== ============
98
Interest expense on deposit accounts consists of the following:
Year Ended December 31,
------------------------------------------
1996 1995 1994
---------- ---------- ----------
NOW and Money Manager accounts $ 351,367 $ 358,124 $ 384,547
Passbook accounts 521,932 800,942 780,394
Money Market Index accounts 713,649 90,795 -0-
Certificate of deposit accounts 6,162,417 6,458,012 4,710,925
---------- ---------- ----------
$7,749,365 $7,707,873 $5,875,866
========== ========== ==========
99
NOTE 9 - BORROWED FUNDS
- -----------------------
As a member of the Federal Home Loan Bank (FHLB) system, the Bank
may utilize various borrowing alternatives, secured by
pledges of mortgage loans and FHLB stock.
At December 31, 1996, the Bank had a total of $55,160,000 in FHLB
advances outstanding. Advances of $500,000 are on an open line
dated May 26, 1994, with interest at a daily adjustable rate
(6.95% at December 31, 1996). The remaining advances of
$54,660,000 have original maturities from 2 to 48 months with
interest rates ranging from 5.08% to 6.13%. Interest is payable
monthly.
At December 31, 1995, the Bank had a total of $59,335,000 in FHLB
advances outstanding. Advances of $3,850,000 were on the open
line of credit, with interest at a daily adjustable rate (5.31%
at December 31, 1995). The remaining advances of $55,485,000 had
original maturities ranging from 3 to 48 months with interest
rates ranging from 4.89% to 6.12%. Interest was payable monthly.
At December 31, 1995, the Bank also had Federal Funds purchased
of $5,000,000 at a commercial bank. The interest rate (6.13% at
December 31, 1995) was adjustable and payable daily.
Required payments of principal on borrowed funds at December 31,
1996, including line of credit and current maturities, are
summarized as follows:
1997 $47,810,000
1998 6,100,000
1999 1,250,000
------------
Total $55,160,000
============
100
NOTE 10 - EMPLOYEE RETIREMENT PLANS
- -----------------------------------
The Bank has a qualified defined contribution 401(k) plan
covering substantially all of its full-time employees. The Bank
matches 50% of the employee's contribution up to a maximum
employee contribution of 4%. The defined contribution 401(k)
retirement plan expense totaled $31,758, $26,868, and $25,658 for
1996, 1995, and 1994, respectively.
The Corporation also sponsors an Employee Stock Ownership Plan
(ESOP) for substantially all of its employees. The ESOP
originally borrowed $1,035,000 from OSB Financial Corp. and
purchased 90,000 shares of Corporation common stock. The loan is
payable at $23,688 on a quarterly basis plus interest at the
prime rate (8.25% at December 31, 1996 and 8.5% at December 31,
1995) over a ten-year amortization. Contributions to the plan
must be sufficient to service the ESOP loan. Any additional
contributions are determined by the Board of Directors.
ESOP expense was $93,521, $105,171, and $105,057 for 1996, 1995,
and 1994, respectively. Dividends earned by the ESOP were
$49,780, $49,629, and $44,642 for 1996, 1995, and 1994,
respectively, and were used to reduce loan principal.
Outstanding ESOP debt at December 31, 1996, is reflected in the
consolidated statement of financial condition as unearned
compensation in stockholders' equity. There are 45,237 shares
remaining to be allocated to ESOP participants at December 31,
1996.
101
NOTE 11 - STOCK BASED COMPENSATION PLAN
- ---------------------------------------
The Corporation has authorized 150,000 shares of common stock to
be allowed for a nonqualified stock option plan for employees and
directors. A committee comprised of at least two directors of
the Corporation administer the plan. The committee determines
the granting of options. The options may be incentive stock
options (ISO) or nonincentive stock options (SO). ISO's option
price may not be less than fair market value at grant date. SO's
option price is established by the committee. The plan's ability
to grant option awards will terminate June 30, 2002, ten years
from the effective date, unless terminated sooner. All options
granted also have an exercise term of ten years from grant date,
unless the grantee owns more than 10% of the outstanding common
stock, in which case the exercise term is five years.
The fair value of each option granted is estimated on the grant
date using the Black-Scholes methodology. The following
assumptions were made in estimating fair value (all options were
granted in 1995):
Dividend yield 3.30%
Risk-free interest rate 5.15%
Expected life 7 years
Expected volatility 30.79%
The weighted average fair value of options granted in 1995 as of
their grant date, using the assumptions shown above, was computed
at $4.56 per option.
The Corporation applies APB Opinion No. 25 in accounting for its
stock option plan. Accordingly, no compensation cost has been
recognized for the plan. Had compensation cost been determined
on the basis of fair value pursuant to SFAS No. 123, net income
and earnings per share would have been reduced as follows:
1996 1995
---------- ----------
Net income:
- ----------
As reported $1,314,877 $ 267,688
========== ==========
Pro forma $1,280,821 $ 251,376
========== ==========
Earnings per share:
- ------------------
As reported $1.17 $0.23
========== ==========
Pro forma $1.12 $0.21
========== ==========
102
As discussed in Note 17, the Corporation has entered into an
agreement for a merger of equals. As part of this merger, all
outstanding stock options become vested. The accelerated vesting
has not been taken into account in the pro forma information
provided above.
The following is a summary of stock option transactions for the
three years ended December 31, 1996:
Number
of Shares Per Share
----------- ------------
Outstanding at December 31, 1993 45,000 $11.50
Granted 3,000 22.50
Exercised (2,000) 11.50
-----------
Outstanding at December 31, 1994 46,000 11.50-22.50
Granted 41,425 21.25-24.25
Exercised (14,000) 11.50
Canceled (1,500) 23.88
-----------
Outstanding at December 31, 1995 71,925 11.50-24.25
Exercised (12,000) 11.50
----------- ------------
Outstanding at December 31, 1996 59,925 $11.50-24.25
=========== ============
Eligible at December 31, 1996,
for exercise currently 25,500
===========
103
The following is a summary of the status of stock options
outstanding at December 31, 1996:
Outstanding Options Exercisable Options
--------------------------------------------------------------------- --------------------------------
Weighted
Average
Remaining Weighted Weighted
Exercise Contractual Average Average
Price Range Number Life Exercise Price Number Exercise Price
-------------- -------------- -------------- -------------- -------------- --------------
$11.50 17,000 Exercisable $11.50 17,000 $11.50
21.00 - 24.00 22,000 3 years 23.03 8,500 22.69
24.25 20,925 3 years 24.25
The Corporation also sponsors a Management Development and
Recognition Plan (MRP) for the benefit of officers and key
management employees. The Corporation has reserved 60,000 shares
of common stock for the MRP. A committee of directors has sole
discretion to determine plan share awards. Compensation expense
is recorded as the recipients become vested in the shares
awarded. Compensation expense is based on the stock's fair
market value at the date of the award. Unvested shares are
reflected in the consolidated statement of financial condition as
unearned compensation in stockholders' equity. At December 31,
1996, 11,350 shares have been awarded to key management employees
at prices between $23.63 and $24.00 per share. These shares vest
at various times during the next 11 years. During 1996, $23,402
has been amortized to expense.
104
NOTE 12 - INCOME TAXES
- ----------------------
The provision for income taxes consists of the following:
Year Ended December 31,
-------------------------------------------
1996 1995 1994
---------- ---------- ----------
Current tax expense:
Federal $702,004 $492,858 $910,000
State 25,000 124,000 252,300
---------- ---------- ----------
Total current 727,004 616,858 1,162,300
---------- ---------- ----------
Deferred tax benefit:
Federal (57,804) (199,858) (115,000)
State (14,000) (51,000) (29,000)
---------- ---------- ----------
Total deferred (71,804) (250,858) (144,000)
---------- ---------- ----------
Change in valuation
allowance (20,000) 320,000 -0-
---------- ---------- ----------
Total provision for
income taxes $635,200 $686,000 $1,018,300
========== ========== ==========
105
Deferred income taxes are provided for the temporary differences
between the financial reporting basis and the tax basis of the
Corporation's assets and liabilities. The major components of
the net deferred tax asset are as follows:
1996 1995
---------- ----------
Deferred tax assets:
Allowance for loan losses $370,000 $185,000
Deferred directors' fees 298,000 260,000
Unrealized loss on securities
available for sale 146,350 25,142
Capital loss carryover 300,000 320,000
Other 56,662 59,858
---------- ----------
Total deferred tax assets 1,171,012 850,000
Valuation allowance (300,000) (320,000)
---------- ----------
Subtotals 871,012 530,000
---------- ----------
Deferred tax liabilities:
Depreciation (506,000) (494,000)
FHLB stock dividends (82,000) (99,000)
Deferred loan fees (72,000) (2,000)
Mortgage servicing rights (63,000) -0-
---------- ----------
Total deferred tax liabilities (723,000) (595,000)
---------- ----------
Net deferred tax asset (liability) $148,012 $(65,000)
========== ==========
The provision for income taxes differs from that computed at the
federal statutory corporate tax rates as follows:
Year Ended December 31,
------------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
----------- ------- ----------- ------- ----------- -------
Income before income taxes $1,950,077 $953,688 $2,720,771
=========== =========== ===========
Tax at federal statutory rates $663,000 34 $324,000 34 $925,000 34
State income taxes - Net of
federal income tax benefits 7,000 48,000 5 147,000 5
Tax-exempt interest and dividend
exclusion (68,000) (3) (66,000) (7) (57,000) (2)
Change in valuation allowance (20,000) (1) 320,000 34 -0-
Other 53,200 3 60,000 6 3,300
----------- ---- ----------- ---- ----------- ----
Totals $635,200 33 $686,000 72 $1,018,300 37
=========== ==== =========== ==== =========== ====
106
NOTE 13 - STOCKHOLDERS' EQUITY
- ------------------------------
At the time of its stock conversion, the Bank established a
liquidation account in an amount equal to its total net worth as
of the date of the latest consolidated statement of financial
condition appearing in the final prospectus. The liquidation
account will be maintained for the benefit of eligible account
holders who continue to maintain their accounts at the Bank after
the conversion. The liquidation account will be reduced annually
to the extent that eligible account holders have reduced their
qualifying deposits. Subsequent increases will not restore an
eligible account holder's interest in the liquidation account.
In the event of a complete liquidation, each account holder will
be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted
qualifying balances for accounts then held. Except for the
purchase of stock and payment of dividends by the Bank, the
existence of the liquidation account will not restrict use or
application of stockholders' equity.
Under federal laws and regulations, the Bank is required to meet
certain tangible, core, and risk-based capital requirements.
Tangible capital generally consists of stockholder's equity minus
certain intangible assets and investments in and advances to
"nonincludable" subsidiaries. Core capital generally consists of
tangible capital plus qualifying intangible assets. The risk-
based capital requirements presently address risk related to both
recorded assets and off-balance-sheet commitments and
obligations.
The following table summarizes the Bank's capital ratios and the
ratios required by federal laws and regulations at December 31,
1996:
Tangible Core Risk-Based
Capital Capital Capital
-------- ------- ----------
($ in Thousands)
Bank's Regulatory Percentage 10.8% 10.8% 22.4%
Required Regulatory Percentage 1.5% 3.0% 8.0%
-------- ------- ----------
Excess Regulatory Percentage 9.3% 7.8% 14.4%
======== ======= ==========
Bank's Regulatory Capital $27,697 $27,697 $28,924
Required Regulatory Capital 3,839 7,678 10,320
-------- ------- ----------
Excess Regulatory Capital $23,858 $20,019 $18,604
======== ======= ==========
107
The following table summarizes the differences between
stockholder's equity of the Bank and its regulatory capital at
December 31, 1996:
Tangible
and Core Risk-Based
Capital Capital
--------- ---------
Stockholder's equity $27,464 $27,464
Add - Unrealized losses on
securities available for sale 249 249
Add - General loss allowance -0- 1,227
Less - Excess mortgage servicing rights 16 16
--------- ---------
Adjusted Regulatory Capital $27,697 $28,924
========= =========
The Bank has been rated by the OTS as a Tier 1 institution which
is defined as "an association that has capital immediately prior
to and on a pro forma basis after giving effect to a proposed
capital distribution that is equal to or greater than the amount
of its fully phased-in capital requirement." It is management's
opinion, as of December 31, 1996, that the Bank meets all capital
adequacy requirements to which it is subject, and there were no
conditions or events since OTS's rating which would have changed
the bank's rating.
The capital distribution regulations allow a Tier 1 association
to make capital distributions during a calendar year up to 100%
of its net income to date plus the amount that would reduce by
one half its surplus capital ratio at the beginning of the
calendar year. Any distributions in excess of that amount
requires prior OTS notice, with the opportunity for OTS to object
to the distribution.
The Bank has qualified under provisions of the Internal Revenue
Code which permit as a deduction from taxable income an allowance
for bad debts which differs from the provision for such losses
charged to income. Accordingly, retained earnings at December
31, 1996 included approximately $8 million for which no provision
for federal income taxes has been made. If in the future this
portion of retained earnings is used for any purpose other than
to absorb bad debt losses, federal income taxes may be imposed at
the then applicable rates.
108
NOTE 14 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
In the ordinary course of business, the Corporation has
outstanding loan commitments, to sell loans on the secondary
market, that are not reflected in the accompanying consolidated
financial statements. At December 31, 1996, the Corporation had
outstanding firm commitments to sell $575,989 of fixed-rate,
first-mortgage loans to Federal National Mortgage Association
(FNMA).
Fees received in connection with these commitments have not been
recognized in income.
Legislation was passed in 1996 to require recapture of previously
allowed tax bad debt provisions. This legislation requires the
corporation to recapture its post-1987 reserves of $412,187, over
an anticipated six-year period. The repayments have an
immaterial impact on the income statement due to the current
deferred tax implications of the allowance for loan losses.
Total recapture required $412,187
1996 recapture recognized (68,698)
----------
Balance to be recaptured 1997-2001 $343,489
109
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
- ---------------------------------------------
Fair value estimates, methods, and assumptions for the
Corporation's financial instruments are summarized as follows.
Cash and Cash Equivalents
- -------------------------
The carrying values approximate the fair values for these assets.
Securities Available for Sale
- -----------------------------
Fair values are based on quoted market prices, where available.
If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
Loans
- -----
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type, such as
commercial, residential mortgage, and other consumer. For
certain homogenous categories of loans, such as fixed-rate
residential mortgages, fair value is estimated using the quoted
market prices for securities backed by similar loans, adjusted
for differences in loan characteristics. The fair value of other
types of loans is calculated by discounting scheduled cash flows
using discount rates reflecting the credit and interest rate risk
inherent in the loan.
Impaired loans are measured at the estimated fair value of the
expected future cash flows at the loan's effective interest rate,
the loan's observable market price or the fair value of the
collateral for loans which are collateral dependent. Therefore,
the carrying values of impaired loans approximate the estimated
fair values for these assets.
Mortgage Servicing Rights
- -------------------------
The fair value of mortgage servicing rights is based on the
present value of future cash flows using discounted rates
applicable to the level of risk of the underlying loans.
110
Deposits
- --------
The fair value of deposits with no stated maturity, such as non-
interest-bearing demand deposits, savings, NOW accounts, money
market, and checking accounts, is the amount payable on demand at
the reporting date. The fair value of fixed-rate time deposits
is calculated using discounted cash flows applying interest rates
currently being offered on similar certificates.
Borrowings
- ----------
Rates currently available for debt with similar terms and
remaining maturities are used to estimate fair value of existing
debt. The fair value of borrowed funds due on demand is the
amount payable at the reporting date.
Off-Balance-Sheet Instruments
- -----------------------------
The fair value of commitments is estimated using the fees
currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
creditworthiness of the counterparties. Since this amount is
immaterial, no amounts for fair value are presented.
The carrying value and estimated fair value of financial
instruments at December 31 were as follows:
1996 1995
------------------------------ -------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------
Financial assets:
Cash and cash equivalents $ 3,985,861 $ 3,985,861 $ 3,789,397 $ 3,789,397
Securities available for sale 70,311,158 70,311,158 79,600,781 79,600,781
Loans held for sale 1,137,004 1,137,048 3,070,257 3,132,381
Loans receivable 170,654,628 172,549,492 165,392,127 165,421,756
Mortgage servicing rights 161,378 179,620 -0- -0-
Federal Home Loan Bank stock 3,166,000 3,166,000 3,065,300 3,065,300
------------ ------------ ------------ ------------
Total financial assets $249,416,029 $251,329,179 $254,917,862 $255,009,615
============ ============ ============ ============
Financial liabilities:
Deposits:
Checking and NOW accounts $ 15,626,116 $ 15,626,116 $ 15,032,587 $ 15,032,587
Passbook accounts 18,018,949 18,018,949 20,674,370 20,674,370
Money manager accounts 3,829,577 3,829,577 4,136,392 4,136,392
Money Market Index accounts 15,288,501 15,288,501 9,756,039 9,756,039
Certificates of deposit 109,359,126 109,648,438 107,182,761 107,606,928
Borrowings 55,160,000 55,104,127 64,335,000 64,419,000
------------ ------------ ------------ ------------
Total financial liabilities $217,282,269 $217,515,708 $221,117,149 $221,625,316
============ ============ ============ ============
111
Limitations
- -----------
Fair value estimates are made at a specific point in time based
on relevant market information and information about the
financial instrument. These estimates do not reflect any premium
or discount that could result from offering for sale at one time
the Corporation's entire holdings of a particular instrument.
Because no market exists for a significant portion of the
Corporation's financial instruments, fair value estimates are
based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters that
could affect the estimates. Fair value estimates are based on
existing on- and off-balance-sheet financial instruments without
attempting to estimate the value of anticipated future business
and the value of assets and liabilities that are not considered
financial instruments. Deposits with no stated maturities are
defined as having a fair value equivalent to the amount payable
on demand. This prohibits adjusting fair value derived from
retaining those deposits for an expected future period of time.
This component, commonly referred to as a deposit base
intangible, is neither considered in the above amounts nor is it
recorded as an intangible asset on the consolidated statement of
financial condition. Significant assets and liabilities that are
not considered financial assets and liabilities include premises
and equipment. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been
considered in the estimates.
112
NOTE 16 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
- -----------------------------------------------------------
The Corporation is a party to financial instruments with off-
balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments
are in the form of commitments to extend credit and involve
elements of credit risk in excess of the amount recognized in the
consolidated statement of financial condition.
The Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual
amount of those instruments. The Corporation uses the same
credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
Financial instruments whose contract amounts represent credit
risk at December 31 are as follows:
1996 1995
---------- ----------
Commitments to purchase
participations in commercial loans $1,281,190 $-0-
========== ==========
Commitments to extend credit:
Fixed rate (7.49% to 9.75% at
December 31, 1996 and 6.875%
to 8.375% at December 31, 1995) $853,750 $1,164,680
Adjustable rate (6.125% to 9.75% at
December 31, 1996 and 6.25% at
December 31, 1995) 1,117,800 71,000
---------- ----------
Total outstanding commitments to
originate loans $1,971,550 $1,235,680
========== ==========
Unused lines of credit/letters
of credit $7,390,312 $2,660,757
========== ==========
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Corporation evaluates
each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if it is deemed necessary by the
Corporation upon extension of credit, is based on management's
credit evaluation of the party. The Corporation also writes
interest-rate caps and floors as part of adjustable rate mortgage
loan products to enable customers to transfer, modify, or reduce
their interest-rate risks.
113
NOTE 17 - PENDING CORPORATE MERGER
- ----------------------------------
On November 14, 1996, the Corporation announced the signing
of a definitive agreement to merge with FCB Financial Corp. of
Neenah, Wisconsin, parent of Fox Cities Bank, F.S.B. The merger
is subject to approval of the shareholders of both corporations,
and is also subject to various regulatory approvals. Based on
the anticipated timetable for the receipt of such approvals, it
is currently expected that the merger will be completed during
the second quarter of 1997.
The "merger of equals" transaction will be structured as a
tax-free, stock for stock merger and accounted for as a purchase
transaction. In the merger, holders of OSB Financial Corp.
common stock will receive 1.46 shares of FCB Financial Corp.
common stock for each share owned.
The merged company will operate under the name FCB Financial
Corp. and will be headquartered in Oshkosh, Wisconsin. After the
merger, the institution will have total assets in excess of $500
million, total loans of nearly $400 million, total deposits of
approximately $300 million, and shareholders' equity of
approximately $75 million.
114
NOTE 18 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
- --------------------------------------------------
STATEMENTS OF FINANCIAL CONDITION
December 31, 1996 and 1995
ASSETS
1996 1995
----------- -----------
Cash $ 4,369,412 $ 2,668,033
Investment securities -0- 3,675,784
Refundable income taxes 50,539 2,350
Investment in subsidiary 27,464,345 26,332,236
Other assets 65,389 117,000
----------- -----------
TOTAL ASSETS $31,949,685 $32,795,403
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $193,839 $161,959
Total stockholders' equity 31,755,846 32,633,444
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $31,949,685 $32,795,403
=========== ===========
STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
----------- ----------- -----------
Interest income $96,659 $278,408 $237,015
Gain on sale of investments 4,581 -0- 25,085
Write-down of securities due to
other than temporary loss in value -0- (191,329) -0-
Equity in net income from subsidiary 1,343,942 331,061 1,608,066
----------- ----------- -----------
Total income 1,445,182 418,140 1,870,166
Other expense 145,105 109,452 104,695
----------- ----------- -----------
Income before provision for income taxes 1,300,077 308,688 1,765,471
Provision for income taxes (14,800) 41,000 63,000
----------- ----------- -----------
Net income $1,314,877 $267,688 $1,702,471
=========== =========== ===========
115
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
------------ ------------ ------------
Cash flows from operating activities:
Net income $1,314,877 $267,688 $1,702,471
------------ ------------ ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in net income of subsidiary (1,343,942) (331,061) (1,608,066)
Gain on sale of investments (4,581) -0- (25,085)
Write-down of equity securities due to
other than temporary loss in value -0- 191,329 -0-
(Increase) decrease in other assets 51,611 (99,442) (3,558)
Increase (decrease) in other liabilities 16,002 (13,266) 12,536
Increase (decrease) in accrued income taxes (48,189) 38,100 (2,100)
Decrease in unearned compensation --
ESOP and MRP 118,117 96,605 94,752
------------ ------------ ------------
Total adjustments (1,210,982) (117,735) (1,531,521)
------------ ------------ ------------
Net cash provided by operating activities 103,895 149,953 170,950
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of investment securities 3,680,365 61,225 628,585
Purchase of investment securities -0- -0- (146,009)
Dividends received from subsidiary -0- 2,000,000 4,000,000
------------ ------------ ------------
Net cash provided by investing activities 3,680,365 2,061,225 4,482,576
------------ ------------ ------------
Cash flows from financing activities:
Exercise of stock options 195,638 228,800 23,000
Purchase of treasury common stock (1,601,257) (1,176,317) (2,381,026)
Dividends paid (677,262) (647,423) (676,007)
------------ ------------ ------------
Net cash used in financing activities (2,082,881) (1,594,940) (3,034,033)
------------ ------------ ------------
Net increase in cash 1,701,379 616,238 1,619,493
Cash at beginning 2,668,033 2,051,795 432,302
------------ ------------ ------------
Cash at end $4,369,412 $2,668,033 $2,051,795
============ ============ ============
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
------------------------------------------------
None.
116
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
DIRECTORS OF THE REGISTRANT
- ---------------------------
The Corporation's Board of Directors consists of eight
members.
The following table sets forth as to each director, his
name, age, principal occupation and the year he first became a
director of the Corporation. Unless otherwise indicated, the
principal occupation listed for each person below has been his
occupation for the past five years.
Year
First Year
Elected Term
Name Age(1) Principal Occupation Director(2) Expires
------------------------ ------ ----------------------------------------------- ------- ------
William P. Jacobsen, Jr. 64 Retired in 1994 as Vice President/Finance, Treasurer and 1979 1997
Chief Financial Officer of Oshkosh B'Gosh, Inc.
Ronald L. Tenpas 53 President of Office Environment, Inc. since January 1, 1987 1997
1996; retired as President and sole owner of Valley
Business Equipment, Inc. in 1994
David L. Baston 52 Owner, Superior Great Lakes, Inc. since August 1996. 1988 1997
Previously, consultant to small businesses
David L. Geurden 51 President of Hrnaks Flowerland and Gifts 1987 1998
David L. Omachinski 45 Vice President/Finance, Treasurer and Chief Financial 1994 1998
Officer of Oshkosh B'Gosh, Inc. since 1993; Executive
Vice President and Chief Operating Officer of Schumaker,
Romenesko & Associates prior to 1993
James J. Rothenbach 46 President and Chief Executive Officer of the Corporation 1995 1996
and the Savings Bank; President and Chief Executive
Officer of Bank One, Stevens Point, Wisconsin, from
February 1990 to June 1995
Dr. Edwin L. Downing 59 Vice Chairman of the Board of Directors of the 1985 1996
Corporation and the Savings Bank. Ophthalmologist - sole
practitioner
Thomas C. Butterbrodt 62 Chairman of the Board of Directors of the Corporation and 1987 1996
Savings Bank. Consultant to Berlin Foundry Corporation
since May 1995; previously, President of Berlin Foundry
Corporation
117
____________________
(1) At December 31, 1996.
(2) In all cases except Mr. Rothenbach's, includes prior
service on the Board of Directors of the Savings Bank.
EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------
The following table sets forth certain information as of
December 31, 1996, with respect to the executive officers of the
Corporation each of whom also holds the same positions with the
Savings Bank.
Name Age Position
----- --- --------
James J. Rothenbach 46 President and Chief Executive Officer
David A. Hayford 50 Vice President-Finance and Treasurer
The following table sets forth certain information as of
December 31, 1996, with respect to the executive officers of the
Savings Bank who are not also executive officers of the
Corporation.
Name Age Position
---- --- --------
Philip C. Westfahl 47 Vice President-Retail Lending
Theodore W. Hoff 49 Vice President-Retail Sales & Service
Thomas J. Dunham 51 Vice President-Business Banking
James J. Rothenbach joined the Corporation and the Savings
Bank July 1, 1995, as President and Chief Executive Officer of
the Corporation, and was appointed President and Chief Executive
Officer of the Savings Bank December 13, 1995. Mr. Rothenbach
has worked for the past 20 years in the commercial banking
industry, most recently as President and Chief Executive Officer
of Bank One, Stevens Point, Wisconsin, from February 1990 to June
1995.
David A. Hayford joined the Savings Bank in 1983. Prior to
that time, he worked for six years at another savings and loan
association and three years in public accounting.
Philip C. Westfahl joined the Savings Bank in 1992 after
working 19 years in the savings and loan industry, mortgage
banking and mortgage insurance.
118
Theodore W. Hoff joined the Savings Bank in 1980. Prior to
that time, he worked for 10 years at two other financial
institutions.
Thomas J. Dunham joined the Savings Bank in July, 1994,
after working 31 years at another financial institution.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
OF 1934
- ------------------------------------------------------------
Forms 5 filed in 1996 by David A. Hayford, Theodore W. Hoff,
Sr. and Philip C. Westfahl, vice presidents of the Savings Bank,
to reflect acquisition of shares pursuant to ESOP allocation,
were inadvertently filed late.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
SUMMARY COMPENSATION INFORMATION. The following table sets
forth compensation information for the fiscal years 1995 through
1996 with respect to the Corporation's President and Chief
Executive Officer, who joined the Corporation on July 1, 1995.
No other executive officer of the Corporation earned or received
more than $100,000 in salary and bonus compensation in 1996. The
amounts reflected in the table were paid by the Savings Bank for
services rendered to the Savings Bank. Officers of the
Corporation do not receive any additional compensation for
serving in such capacities. The person named in the table is
sometimes referred to herein as the "named executive officer."
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
-------------------------------- -----------------------
Awards
-----------------------
Restricted Securities
Name and Other Annual Stock Underlying All Other
Principal Salary Bonus Compensation Award(s) Stock Compensation
Position Year ($) ($) ($) ($) Options(#) ($)
------------------- ---- -------- ------ ------------ --------- ---------- ------------
James J. Rothenbach 1996 103,900 30,765 2,854 236,250<1> -- 13,774<2>
President & CEO 1995 50,000 13,000 20,890<3> 18,187<4> 14,175 0
1994 -- -- -- -- -- --
119
____________________
<1> Represents the dollar value of 10,000 shares of Common Stock
on February 14, 1996, the date on which the shares were
awarded under the Corporation's Management Development and
Recognition Plan, and is based on the closing price of the
Common Stock of $23.625 per share as reported on the Nasdaq
Stock Market on that date. The award vests with respect to
1,000 shares on each January 1 from 2000 to 2007 and with
respect to 2,000 shares on January 1, 2008. As of December
31, 1996, these 10,000 shares plus the 750 shares awarded to
Mr. Rothenbach in 1995 had a value of $292,938, based on the
closing price of the Common Stock of $27.25 per share as
reported on the Nasdaq Stock Market on that date. The
Merger Agreement permits the Board of Directors to
accelerate the vesting of such awards and it is anticipated
that the Board of Directors will accelerate such vesting on
or before the closing date of the Merger. Dividends are
payable on the shares covered by the award.
<2> Represents the dollar value of contributions made by the
Savings Bank under its Profit Sharing Plan and ESOP in the
amount of $1,592 and $12,182, respectively. The value of
the ESOP contributions is based on the value of the
Corporation's Common Stock on the date the Common Stock is
allocated.
<3> Includes reimbursement of relocation expenses totaling
$17,312.
<4> Represents the dollar value of 750 shares of Common Stock on
November 8, 1995, the date on which the shares were awarded
under the Corporation's Management Development and
Recognition Plan, and is based on the closing price of the
Common Stock of $24.25 per share as reported on the Nasdaq
Stock Market on November 7, 1995, the last date on which the
Common Stock was traded on the Nasdaq Stock Market prior to
the date of grant. No Common Stock traded on the Nasdaq
Stock Market on the date of grant. The award vests with
respect to 250 shares on each of January 1, 1998, January 1,
2000, and January 1, 2002. The Merger Agreement permits the
Board of Directors to accelerate the vesting of such awards
and it is anticipated that the Board of Directors will
accelerate such vesting on or before the closing date of the
Merger. Dividends are payable on the shares covered by the
award.
120
The following table sets forth information regarding the
fiscal year-end values of unexercised stock options held by the
named executive officer of the Corporation. No stock options
were exercised by the named executive officer during the fiscal
year ended December 31, 1996.
FISCAL YEAR-END STOCK OPTION VALUES
Number of Securities Value of Unexercised
Underlying Unexercised Stock In-the-Money Stock Options
Options at Fiscal Year End (#) at Fiscal Year End ($)<1>
------------------------------ ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
--------------------- ------------- ------------- ------------- -------------
James J. Rothenbach 14,175<2> 0 55,025 0
____________________
<1> This amount represents the difference in the market value of
one share of the Corporation's Common Stock on December 31,
1996 and the exercise price per share, times the number of
shares subject to outstanding options. The Merger Agreement
provides that the options will be exchanged for FCB options
on the closing date of the Merger.
<2> 13,175 of the 14,175 became exercisable as a result of a
provision in the Corporation's Stock Option and Incentive
Plan which provides that all outstanding options become
immediately exercisable in the event of a change in control
or on imminent change in control. The execution of the
Merger Agreement constitutes a change in control under the
Stock Option and Incentive Plan.
EMPLOYMENT AGREEMENTS. On July 1, 1995, the Corporation
entered into a three-year employment agreement with Mr.
Rothenbach, providing for an annual salary of at least $100,000.
The agreement further provides that Mr. Rothenbach's salary will
be subject to review at least annually by the Board of Directors
and may be increased in such amounts as the Board in its
discretion may decide. The agreement is terminable by the
Corporation for just cause at any time or in certain events
specified under the Federal Deposit Insurance Act or the
regulations of the Office of Thrift Supervision. The agreement
also provides for severance payments if employment is terminated
following a change in control equal to 2.99 times the average
annual compensation paid to Mr. Rothenbach during the five years
(or such shorter period of time as Mr. Rothenbach shall have been
employed by the Corporation) immediately preceding the change in
control. The agreement was amended on December 13, 1995, to
provide that its three-year term would run from January 1, 1996,
to December 31, 1998, rather than from July 1, 1995, to June 30,
1998, as originally provided.
121
Under the terms of the Merger Agreement, Mr. Rothenbach will
cancel his existing employment agreement with the Corporation and
will enter into a new employment agreement with FCB and Fox
Cities Bank, F.S.B. Accordingly, the Merger Agreement
contemplates that Mr. Rothenbach will not receive a severance
payment under the change in control provisions in his current
employment agreement as a result of the Merger.
DIRECTORS' COMPENSATION
- -----------------------
DIRECTORS' FEES. All members of the Board of Directors,
except Mr. Rothenbach and the Chairman of the Board, received a
fee of $750 for each Board meeting attended. The Chairman of the
Board received a fee of $825 for each meeting attended.
Directors who are members of the Executive Committee, which meets
on an as-needed basis, and other committees receive $300 for each
committee meeting attended.
DEFERRED COMPENSATION PLAN. Directors may elect to defer
the directors' fees paid to them by the Savings Bank until
retirement with no income tax payable by the director until
retirement benefits are received. This alternative is made
available through a deferred compensation plan for directors
adopted by the Savings Bank in 1982. The deferred compensation
with accrued interest is to be paid to the director or his or her
heirs in cash over a number of years and terms selected by the
director. The payments begin in the first year following
retirement, death or disability.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
-----------------------------------------------
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Shareholders of record as of the close of business on March
7, 1997, are entitled to one vote for each share of common stock
of the Corporation ("Common Stock") then held. Stockholders are
not permitted to cumulate their votes for the election of
directors. As of March 7, 1997, the Corporation had 1,112,984
shares of Common Stock issued and outstanding.
122
The following table sets forth, as of March 7, 1997,
certain information as to those persons known by the corporation
to be the beneficial owners of more than 5% of the outstanding
shares of Common Stock.
Name and Address of Amount and Nature of Percent of Common
Beneficial Owner Beneficial Ownership (1) Stock Outstanding
---------------------------------------- ------------------------- -------------------------
First Manhattan Co. 62,000(2) 5.30%
437 Madison Avenue
New York, New York 10022
Wellington Management Company 64,800(3) 5.82%
75 State Street
Boston, Massachusetts 02109
First Financial Fund, Inc. 64,800(4) 5.82%
One Seaport Plaza, 25th Floor
New York, New York 10292
- ----------------------------------------------
(1) Unless otherwise indicated, the nature of beneficial
ownership for shares shown in this column is sole voting and
investment power.
(2) Source: Schedule 13G, dated February 5, 1997. Includes the
following beneficial ownership: 47,735 shares owned with
sole voting power; 5,765 shares owned with shared voting
power; 47,735 shares owned with sole dispositive power; and
14,265 shares owned with shared dispositive power.
(3) Source: Schedule 13G, dated January 24, 1997. All 64,800
shares are owned with sole voting power and shared dispositive
power.
(4) Source: Schedule 13G, dated February 14, 1997. All 64,800
shares are owned with the sole voting power and shared
dispositive power.
123
(b) SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of March 7, 1997, the
number of shares of Common Stock beneficially owned by each
director, the executive officers named in the Summary
Compensation Table below, and all directors and executive
officers of the Corporation as a group.
Name and Address of Amount and Nature of Percent of Common
Beneficial Owner Beneficial Ownership (1) Stock Outstanding
---------------------------------------- ------------------------- -------------------------
William P. Jacobsen, Jr. 20,400 1.83%
Ronald L. Tenpas 14,130 1.27%
David L. Baston 21,925 1.96%
James J. Rothenbach 14,847 1.32%
David L. Geurden 20,358 1.82%
Dr. Edwin L. Downing 11,695 1.05%
Thomas C. Butterbrodt 32,000 2.87%
David L. Omachinski 4,000 0.36%
All directors and executive officers as 161,894 13.97%
a group (12 persons)
- ------------------------------------
(1) Except for 1,965 and 1,800 shares owned by the respective spouses
of Messrs. Geurden and Baston (each of whom has disclaimed
beneficial ownership), all shares are owned directly by the named
individuals or by the individuals indirectly through a trust or
corporation or as custodians for the shares of minor children or
grandchildren. The named individuals effectively exercise voting
and investment power over such shares.
The beneficially-owned shares set forth above include the
following shares that the beneficial owner has the right to
acquire within 60 days through the exercise of stock options:
Directors Jacobsen, Tenpas, Baston, Geurden, Downing, and
Omachinski, 3,000 each; Director Rothenbach, 14,175; Director
Butterbrodt, 1,500; all directors and executive officers as a
group, 45,925.
(c) CHANGES IN CONTROL
The corporation is not aware of any arrangements, including any
pledge by any person of securities of the Corporation, the operation
of which may at a subsequent date result in a change in control of the
Corporation, except for the Agreement and Plan of Merger, dated
November 13, 1996, entered into by the Corporation with FCB Financial
Corp.
124
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Prior to the enactment of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA"), the Savings
Bank had a policy of offering preferred mortgage loans to
officers, directors and employees for the financing and
improvement of their personal residences. These loans were made
in the ordinary course of business and were made on substantially
the same terms, except for interest rates or the waiver of fees,
as those of comparable transactions and do not involve more than
the normal risk of collectability or contain other unfavorable
features. As a result of FIRREA, beginning January 1, 1990,
directors and officers may no longer receive any loans on
preferred terms. The terms of existing loans on that date did
not change, as allowed by the legislation.
The following table sets forth information regarding loans
to directors and executive officers of the Corporation that were
originated by the Savings Bank on preferential terms and which
aggregated more than $60,000 during the year ended December 31,
1996.
Highest Balance
During Year Balance at
Name and Original Date Original Loan Ended December December 31, Contract
Position Type of Loan of Loan Balance 31, 1996 1996 Interest Rate
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
David L. Baston ARM<1> 1989 $180,000 $73,095 $64,854 8.75%
Director
_________________________
<1> Adjustable rate mortgage loan secured by residential
property.
125
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
----------------------------------------------------
(a)(1) FINANCIAL STATEMENTS.
Independent Auditor's Report
Consolidated Statements of Financial Condition as of
December 31, 1996 and 1995
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended
as of December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
See Item 8 for the Registrant's Consolidated Financial
Statements.
(a)(2) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted as the required
information is either inapplicable or included in the
Notes to Consolidated Financial Statements.
(a)(3) EXHIBITS
See Exhibit Index and exhibits attached.
(b) FORM 8-K
The Registrant filed a Form 8-K on November 25, 1996 to
report the execution of an Agreement and Plan of Merger
with FCB Financial Corp.
126
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OSB FINANCIAL CORP.
Date: March 3, 1997
By: /s/ James J. Rothenbach
-----------------------------------------
James J. Rothenbach
President, Chief Executive
Officer and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act
of 1934, as amended, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
/s/ James J. Rothenbach /s/ David L. Geurden
- ----------------------------- -----------------------------
James J. Rothenbach David L. Geurden
President, Chief Executive Director
Officer and Director Date: March 3, 1997
(Principal Executive Officer)
Date: March 3, 1997
- ----------------------------- -----------------------------
William P. Jacobsen, Jr. Ronald L. Tenpas
Director Director
Date: March ___, 1997 Date: March ___, 1997
/s/ David A. Hayford /s/ David L. Baston
- ----------------------------- -----------------------------
David A. Hayford David L. Baston
Vice President-Finance Director
and Treasurer Date: March 4, 1997
(Principal Financial Officer)
Date: March 3, 1997
/s/ Dr. Edwin L. Downing
- ----------------------------- -----------------------------
Dr. Edwin L. Downing David L. Omachinski
Director Director
Date: March 3, 1997 Date: March ___, 1997
/s/ Thomas C. Butterbrodt
- -----------------------------
Thomas C. Butterbrodt
Director
Date: March 4, 1997
127
EXHIBIT INDEX
-------------
Exhibit Exhibit Page
No. ------- No.
------- -----
2 Agreement and Plan of Merger and associated Stock Option and --
Trigger Payment Agreements between OSB Financial Corp. and FCB
Financial Corp. (incorporated herein by reference to Exhibits
2.1, 2.2 and 2.3 of Registrant's Form 8-K; filed on November
25, 1996)
3.1 Articles of Incorporation of OSB Financial Corp. (incorporated --
herein by reference to Exhibit 3.1 of Registrant's Form S-1,
Registration Statement; filed on March 30, 1992, Registration
No. 33-46884)
3.2 Bylaws of OSB Financial Corp. (incorporated herein by --
reference to Exhibit 3.2 of Registrant's Form S-1,
Registration Statement; filed on March 30, 1992, Registration
No. 33-46884)
4 Form of Stock Certificate (incorporated herein by reference to --
Exhibit 4 to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994; filed on April 2, 1995)
10.1 OSB Financial Corp. 1992 Stock Option and Incentive Plan --
(incorporated herein by reference to Exhibit A of Registrant's
Definitive Proxy Statement for the First Annual Meeting of
Stockholders held on April 22, 1993; filed on March 25, 1993)
10.2 Oshkosh Savings Bank, FSB Management Development and --
Recognition Plan and Trust Agreements (incorporated herein by
reference to Exhibit B to the Definitive Proxy Statement for
the First Annual Meeting of Stockholders held on April 22,
1993; filed on March 25, 1993)
10.3 Employment Agreement between OSB Financial Corp. and James J. --
Rothenbach dated July 1, 1995, and Amendment to Employment
Agreement between OSB Financial Corp. and James J. Rothenbach
dated December 13, 1995 (incorporated herein by reference to
Exhibit 10.3 to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995; filed on April 2,
1996)
11 Statement re: Computation of Per Share Earnings 128
21 Subsidiaries of the Registrant 129
23 Consent of Independent Public Accountants 130
27 Financial Data Schedule 131